Advanced Entrepreneurship - Full Text

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Notes for CHG 860
Advanced Entrepreneurship – Full Text

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Table of Contents
Notes for CHG 860 ........................................................................................................................................ 1
Advanced Entrepreneurship – Full Text ........................................................................................................ 1
Table of Contents .......................................................................................................................................... 2
What is an Entrepreneur? ........................................................................................................................... 12
What is Entrepreneurship? ......................................................................................................................... 12
What is Intra-preneurship? ......................................................................................................................... 12
What is Micro-preneurship? ....................................................................................................................... 12
What is a Business? ..................................................................................................................................... 13
What is a Small Business? ........................................................................................................................... 13
Entrepreneur versus Small Business ........................................................................................................... 13
Small Business owner to a Successful Entrepreneurship............................................................................ 14
The Meaning ........................................................................................................................................... 14
Advantages.............................................................................................................................................. 14
Disadvantages ......................................................................................................................................... 15
Small Business owner to a Successful Entrepreneurship........................................................................ 15
Concluding the discussion....................................................................................................................... 15
Types of Entrepreneur ................................................................................................................................ 16
Social entrepreneur ................................................................................................................................ 16
Serial entrepreneur ................................................................................................................................. 16
Lifestyle entrepreneur ............................................................................................................................ 16
Cooperative entrepreneur ...................................................................................................................... 17
Theory-based Typologies ........................................................................................................................ 17
Levels of Entrepreneurial Development ..................................................................................................... 17
Level One: The Self-Employed Mindset .................................................................................................. 17

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Level Two: The Managerial Perspective ................................................................................................. 18
Level Three: The Attitude of Owner/Leader ........................................................................................... 19
Level Four: The Entrepreneurial Investor ............................................................................................... 19
Level Five: The True Entrepreneur .......................................................................................................... 20
Twelve Characteristics of Entrepreneur ..................................................................................................... 20
#1) Confident .......................................................................................................................................... 21
#2) Feels a Sense of Ownership .............................................................................................................. 21
#3) Able to Communicate ....................................................................................................................... 21
#4) Passionate about Learning ................................................................................................................ 21
#5) Team Player ...................................................................................................................................... 22
#6) System-Oriented ............................................................................................................................... 22
#7) Dedicated .......................................................................................................................................... 22
#8) Grateful ............................................................................................................................................. 22
#9) Optimistic .......................................................................................................................................... 23
#10) Gregarious....................................................................................................................................... 23
#11) A Leader by Example....................................................................................................................... 23
#12) Not Afraid of Risk or Success .......................................................................................................... 23
Types of Entrepreneurships ........................................................................................................................ 23
Small Business Entrepreneurship............................................................................................................ 24
Scalable Startup Entrepreneurship ......................................................................................................... 24
Large Company Entrepreneurship .......................................................................................................... 24
Social Entrepreneurship .......................................................................................................................... 24
Entrepreneurship versus Intrapreneurship ................................................................................................ 24
Entrepreneurship and intrapreneurship: advantages and disadvantages ................................................. 25
Entrepreneurship and intrapreneurship: similarities and differences .......................................................... 26

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Types of Business ........................................................................................................................................ 27
Sole proprietorship ................................................................................................................................. 27
What is a Sole Proprietorship? ........................................................................................................... 27
Advantages and Disadvantages of a sole proprietorship ................................................................... 27
Public Limited Company ......................................................................................................................... 28
Non-Governmental Organization (NGO) ................................................................................................ 28
Limited Company (LTD) ........................................................................................................................... 29
Limited Liability Company (LLC) .............................................................................................................. 29
Private Company Limited by Guarantee ................................................................................................. 29
Private company limited by shares ......................................................................................................... 29
Unlimited Company ................................................................................................................................ 29
General Partnership ................................................................................................................................ 30
Limited liability partnership .................................................................................................................... 30
Limited partnership................................................................................................................................. 30
Money ......................................................................................................................................................... 32
Seed Money ................................................................................................................................................ 32
Angel Investor – Angel Investing................................................................................................................. 33
Crowd funding............................................................................................................................................. 33
Venture Capital ........................................................................................................................................... 34
Venture Capitalist ....................................................................................................................................... 34
What's the difference between a venture capitalist and an angel investor? ............................................. 35
Concept of Venture Capital......................................................................................................................... 35
Features of Venture Capital .................................................................................................................... 36
High Risk .............................................................................................................................................. 36
High Tech............................................................................................................................................. 36
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Equity Participation & Capital Gains ................................................................................................... 36
Participation In Management ............................................................................................................. 36
Length of Investment .......................................................................................................................... 37
Illiquid Investment .............................................................................................................................. 37
Venture Capital Investment Process ........................................................................................................... 37
Deal origination:...................................................................................................................................... 37
Screening:................................................................................................................................................ 38
Due Diligence: ......................................................................................................................................... 38
Deal Structuring: ..................................................................................................................................... 38
Post Investment Activities: ..................................................................................................................... 38
Exit: ......................................................................................................................................................... 38
The Venture Capital Financing Spectrum ................................................................................................... 39
1. Seed Capital......................................................................................................................................... 41
2. Start up Capital.................................................................................................................................... 42
3. Early Stage Finance ............................................................................................................................. 43
4. Second Stage Finance ......................................................................................................................... 44
5. Later Stage Finance ............................................................................................................................. 44
Expansion / Development Finance ......................................................................................................... 45
Replacement Finance .............................................................................................................................. 45
Buy – out / Buy – in Financing................................................................................................................. 45
Turnaround Finance ................................................................................................................................ 46
Bridge Finance......................................................................................................................................... 46
Venture capital financing ............................................................................................................................ 46
Overview ................................................................................................................................................. 46
Venture capital financing process ........................................................................................................... 47

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The Seed Stage ........................................................................................................................................ 47
Example ............................................................................................................................................... 48
Risk ...................................................................................................................................................... 48
The Start-up Stage .................................................................................................................................. 48
Example ............................................................................................................................................... 49
Risk ...................................................................................................................................................... 49
The Second Stage .................................................................................................................................... 50
Example ............................................................................................................................................... 50
Risk ...................................................................................................................................................... 51
The Third Stage ....................................................................................................................................... 51
Example ............................................................................................................................................... 52
Risk ...................................................................................................................................................... 52
The Bridge/Pre-public Stage ................................................................................................................... 53
Example ............................................................................................................................................... 53
Risk ...................................................................................................................................................... 54
At Last ..................................................................................................................................................... 54
Initial Public Offering .................................................................................................................................. 55
Reasons for listing ................................................................................................................................... 55
Disadvantages of an IPO ......................................................................................................................... 56
Procedure................................................................................................................................................ 56
Pricing of IPO ........................................................................................................................................... 57
Types of IPO ............................................................................................................................................ 58
Market Definition........................................................................................................................................ 58
Marketing .................................................................................................................................................... 60
Selling .......................................................................................................................................................... 60
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Difference Between Selling And Marketing ................................................................................................ 61
Selling ...................................................................................................................................................... 62
Marketing ................................................................................................................................................ 62
Advertising .................................................................................................................................................. 62
Advertising theory................................................................................................................................... 63
Hierarchy of effects model.................................................................................................................. 63
Means-End Theory .............................................................................................................................. 63
Leverage Points ................................................................................................................................... 63
Verbal and Visual Images .................................................................................................................... 63
Types of Advertising................................................................................................................................ 63
Television advertising / Music in advertising ...................................................................................... 64
Infomercials......................................................................................................................................... 64
Radio Advertising ................................................................................................................................ 64
Online Advertising............................................................................................................................... 64
Product Placements ............................................................................................................................ 65
Press Advertising ................................................................................................................................. 65
Billboard Advertising ........................................................................................................................... 65
Mobile Billboard Advertising .............................................................................................................. 65
In-Store Advertising ............................................................................................................................ 66
Coffee Cup Advertising ....................................................................................................................... 66
Street Advertising ............................................................................................................................... 66
Sheltered Outdoor Advertising ........................................................................................................... 66
Celebrity Branding .............................................................................................................................. 66
The Business Plan........................................................................................................................................ 68
Audience ................................................................................................................................................. 68
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Content ................................................................................................................................................... 68
Presentation formats .............................................................................................................................. 69
Typical Business Plan Outline...................................................................................................................... 70
Expanded Business Plan Outline ................................................................................................................. 70
Outline of a Business Plan ........................................................................................................................... 71
Marketing .................................................................................................................................................... 74
The Marketing Concept .............................................................................................................................. 75
The Societal Marketing Concept ................................................................................................................. 76
Market Analysis........................................................................................................................................... 77
Market Size ............................................................................................................................................. 77
Market Growth Rate ............................................................................................................................... 77
Market Profitability ................................................................................................................................. 78
Industry Cost Structure ........................................................................................................................... 78
Distribution Channels.............................................................................................................................. 78
Market Trends......................................................................................................................................... 78
Key Success Factors................................................................................................................................. 79
The Marketing Process................................................................................................................................ 79
I. Situation Analysis ................................................................................................................................. 79
II. Marketing Strategy ............................................................................................................................. 80
III. Marketing Mix Decisions .................................................................................................................... 80
IV. Implementation and Control ............................................................................................................. 80
Situation Analysis ........................................................................................................................................ 81
Company ................................................................................................................................................. 81
Collaborators........................................................................................................................................... 81
Customers ............................................................................................................................................... 81
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Competitors ............................................................................................................................................ 81
Climate (or context) ................................................................................................................................ 82
Information Sources................................................................................................................................ 82
The Marketing Mix (The 4 P's of Marketing) .............................................................................................. 82
Product Decisions.................................................................................................................................... 83
Price Decisions ........................................................................................................................................ 83
Distribution (Place) Decisions ................................................................................................................. 84
Promotion Decisions ............................................................................................................................... 84
Limitations of the Marketing Mix Framework ........................................................................................ 84
Conducting Market Research...................................................................................................................... 84
PEST Analysis or STEP Analysis.................................................................................................................... 86
Political Analysis ...................................................................................................................................... 86
Economic Analysis ................................................................................................................................... 87
Social Analysis ......................................................................................................................................... 87
Technological Analysis ............................................................................................................................ 87
Small and Medium-Sized enterprise (SME’s) .............................................................................................. 88
Micro, Small and Medium Enterprises (MSMEs) ........................................................................................ 88
Key Drivers Of MSME’s Sub-Sector In The Nigerian Economy .................................................................... 89
Bank Of Industry (BOI) ............................................................................................................................ 89
Overview ............................................................................................................................................. 89
Products .............................................................................................................................................. 90
Who Can BOI Assist? ........................................................................................................................... 90
Some of the achievements of BOI are as follows: .............................................................................. 90
Benefits of The US-BOI AGOA Resource Center ................................................................................. 91
BOI/UNDP Access To Renewable Energy Programme ........................................................................ 91

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BOI Milestones As Manager Of Specialized Development Funds ....................................................... 92
Central Bank Of Nigeria(CBN) ................................................................................................................. 92
Entrepreneurship Development Centers ............................................................................................ 92
Other Objectives of the Entrepreneurship Development Centers: .................................................... 92
Provision of Intervention Fund ........................................................................................................... 93
Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) ......................................... 93
SMEDAN’s Mandate ............................................................................................................................ 93
Some of the achievements of SMEDAN are as follows:...................................................................... 94
SMEDAN And Voluntary Services Overseas Partner For Under-Privileged Empowerment ............... 94
SMEDAN and Corporate Affairs Commission (CAC) Agree On Simplifying Business Registration ...... 94
SMEDAN, Nigerian Film Corporation Partner On Entrepreneurship .................................................. 95
SMEDAN And Collaborating Agencies ................................................................................................. 95
Potential Niches For Chemical Engineers And Other Entrepreneurs In MSMEs ........................................ 96
Summary of the Entrepreneurial Business ............................................................................................... 100
Important Points in Entrepreneurship ...................................................................................................... 100
General Assessment of MSMEs In Nigeria ................................................................................................ 101
Entrepreneurial Opportunities In Chemical Engineering (in Nigeria) ....................................................... 104
Industries Hiring Chemical Engineering ................................................................................................ 104
Areas of Opportunity ............................................................................................................................ 104
Food Processing .................................................................................................................................... 105
Palm Oil Reprocessing ........................................................................................................................... 105
Palm Kernel Shell Processing ................................................................................................................ 105
Cassava Cakes ....................................................................................................................................... 105
Lime Production .................................................................................................................................... 105
Mineral Processing ................................................................................................................................ 105

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Soap Production .................................................................................................................................... 105
Metal Recycling ..................................................................................................................................... 106
Paint ...................................................................................................................................................... 106
Pulp and Paper ...................................................................................................................................... 106
Biogas .................................................................................................................................................... 106
Biodiesel ................................................................................................................................................ 106
Water .................................................................................................................................................... 106

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What is an Entrepreneur?
An entrepreneur is an owner or manager of a business enterprise who makes money through
risk and/or initiative. Entrepreneur in English is a term applied to a person who is willing to help
launch a new venture or enterprise and accept full responsibility for the outcome.
What is Entrepreneurship?
Entrepreneurship is the act of being an entrepreneur or "one who undertakes innovations,
finance and business acumen in an effort to transform innovations into economic goods". This
may result in new organizations or may be part of revitalizing mature organizations in response
to a perceived opportunity. The most obvious form of entrepreneurship is that of starting new
businesses (referred as Startup Company); however, in recent years, the term has been extended
to include social and political forms of entrepreneurial activity. When entrepreneurship is
describing activities within a firm or large organization it is referred to as intra-preneurship and
may include corporate venturing, when large entities spin-off organizations.
What is Intra-preneurship?
Intrapreneurship is the act of behaving like an entrepreneur while working within a large
organization. The American Heritage Dictionary acknowledged the popular use of a new word,
intrapreneur, to mean "A person within a large corporation who takes direct responsibility
for turning an idea into a profitable finished product through assertive risk-taking and
innovation". Intrapreneurship is now known as the practice of a corporate management style that
integrates risk-taking and innovation approaches, as well as the reward and motivational
techniques, that are more traditionally thought of as being the province of entrepreneurship
"Intrapreneurship refers to employee initiatives in organizations to undertake something
new, without being asked to do so." Hence, the intrapreneur focuses on innovation and
creativity, and transforms an idea into a profitable venture, while operating within the
organizational environment. Thus, intrapreneurs are Inside entrepreneurs who follow the goal of
the organization. Intrapreneurship is an example of motivation through job design, either
formally or informally. (See also Corporate Social Entrepreneurship: intrapreneurship within the
firm which is driven to produce social capital in addition to economic capital.) Employees, such
as marketing executives or perhaps those engaged in a special project within a larger firm, are
encouraged to behave as entrepreneurs, even though they have the resources, capabilities and
security of the larger firm to draw upon. Capturing a little of the dynamic nature of
entrepreneurial management (trying things until successful, learning from failures, attempting to
conserve resources, etc.) adds to the potential of an otherwise static organization, without
exposing those employees to the risks or accountability normally associated with entrepreneurial
failure.
What is Micro-preneurship?
Short answer - entrepreneurship on a micro level
Longer answer - It’s the act of starting and completing small projects that are just
outside your capacity - allowing you to meet new people, develop new skills, focus your energies
on producing something useful, and growing as a person.
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What is a Business?
A business (also known as enterprise or firm) is an organization engaged in the trade of
goods, services, or both to consumers.[1] Businesses are predominant in capitalist economies,
where most of them are privately owned and administered to earn profit to increase the wealth of
their owners. Businesses may also be not-for-profit or state-owned. A business owned by
multiple individuals may be referred to as a company, although that term also has a more precise
meaning.
The etymology of "business" relates to the state of being busy either as an individual or
society as a whole, doing commercially viable and profitable work. The term "business" has at
least three usages, depending on the scope — the singular usage to mean a particular
organization; the generalized usage to refer to a particular market sector, "the music business"
and compound forms such as agribusiness; and the broadest meaning, which encompasses all
activity by the community of suppliers of goods and services. However, the exact definition of
business, like much else in the philosophy of business, is a matter of debate and complexity of
meanings.
What is a Small Business?

A small business, also called a mom and pop store by some in the United States, is a
business that is privately owned and operated, with a small number of employees and relatively
low volume of sales. Small businesses are normally privately owned corporations, partnerships,
or sole proprietorships. The legal definition of "small" varies by country and by industry, ranging
from fewer than 15 employees under the Australian Fair Work Act 2009, 50 employees in the
European Union, and fewer than 500 employees to qualify for many U.S. Small Business
Administration programs. Small businesses can also be classified according to other methods
such as sales, assets, or net profits.
Small businesses are common in many countries, depending on the economic system in
operation. Typical examples include: convenience stores, other small shops (such as a bakery or
delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses,
photographers, small-scale manufacturing, and online business, such as web design and
programming, etc.
Entrepreneur versus Small Business

Many people use the terms "Entrepreneur" and "Small Business owner" synonymously. While
they may have much in common, there are significant differences between the entrepreneurial
venture and the small business. Entrepreneurial ventures differ from small businesses in these
ways:
1. Amount of wealth creation - rather than simply generating an income stream that replaces
traditional employment, a successful entrepreneurial venture creates substantial wealth,
typically in excess of several million dollars of profit.
2. Speed of wealth creation - while a successful small business can generate several million
dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for
example, within 5 years.
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3. Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive
of sure profits many entrepreneurs would not be pursuing the idea and the opportunity no
longer would exist.
4. Innovation - entrepreneurship often involves substantial innovation beyond what a small
business might exhibit. This innovation gives the venture the competitive advantage that
results in wealth creation. The innovation may be in the product or service itself, or in the
business processes used to deliver it.
Small Business owner to a Successful Entrepreneurship

Where does an Entrepreneur come from ? Can we say it is a small business owner who
could take his business to the next level? Entrepreneurs are not necessarily big, it ranges in
scale from solo projects to major undertakings creating huge job opportunity. A small business
owner is often satisfied in his small craftsmanship. However, an entrepreneur exploits his talent
and has constant urge to evolve his business, keeping aside the monetary interest remains
constant while the business grows. A small business owner needs to be inspired and have the
constant drive to grow himself into an entrepreneur. Running a one-person business is a
creative, flexible and challenging way to become your own boss and chart your own future. It is
about creating a life, as it is about making a living. It takes courage, determination and foresight
to decide to become an entrepreneur. From the relatively safe cocoon of the corporate world,
where pay checks arrive regularly, an entrepreneur ventures into the unchartered territories of
business.
Here are a few points which show the connection between small business and
entrepreneurship.
The Meaning
Lets first know what these two terms mean. Small business is a business with comprises
of few number of employees. For a company to be termed as a small business depends in
different countries. For example, in United States a company is generally under 100 employees
and in Australia it should be under 20 employees. These businesses are generally privately
owned sole-proprietorships, corporations or partnership. On the other hand, entrepreneurship
means starting new organizations or revitalizing mature organizations, particularly new
businesses generally in response to identify opportunities. It's a difficult undertaking, because
most of these businesses fail at a very early stage. In the beginning of the business the term
"Small Business Owner" and "Entrepreneur" are interchangeable.
Advantages
Every business has its own advantages and disadvantages. As for talking about small
business, it requires less initial capital to start the business. Its sources of funding can be self
financing, loans from friends and relatives, private stock issue, forming partnerships and SME
finance which includes collateral based funding or venture capital . The owner can keep a close
check on the accounts and books. Also, a small business owner can build intimate relations with
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his clients which results in better creditability and responsiveness. For a Entrepreneur, has the
inclination to grow his business to the highest level, which in turns leads to high quality products
and better job opportunity. As a bigger organization, it encourages use of modern technology
with research activity for quality improvement. Innovative and strategic ideas are developed to
enhance product quality. Contributes to the economy by giving better quality products for export.
Healthy competition lets the entrepreneur work towards better quality services constantly.
Disadvantages
The typical entrepreneurship is a small business. The success of any business is
measured by its financial growth. This also applies to large businesses who wish to start up a
new business within the current corporate framework. Small business often faces problems
related to their size like these businesses fail because of undercapitalization. The owner, before
starting the business, needs to make sure he has access to enough capital to support his project
for at least one year, anticipating his expenses. Another problem that is often realized in small
business is the "Entrepreneurial Myth", which means any person who is technically trained in
any field, has a myth he can run the business efficiently. However, additional management skills
are required to run the business. A small business owner, who wants to survive in the
competition, not only needs to take care of the above listed issues but also what a bigger
entrepreneur would face. An entrepreneur needs to carry total load of debts, long works hours
are required to keep up with no additional overtime or holiday pay which affects an individuals
personal and social life. Apart from these an entrepreneur also needs to assume all risks from
start up through operations and customer satisfaction, he also needs to maintain and improve
his expertise for continues growth for which business concepts and marketing strategies are
required. Needs to anticipate competition and have strategies ready to face them.
Small Business owner to a Successful Entrepreneurship

First of all a small business owner needs to have a vision and passion to succeed. There
are several points that needs to be kept in mind to drive a small business to the heights of roaring
success. Starting with having the right attitude, an entrepreneur needs to be optimistic, open to
new ideas and be willing to research , ask questions and reflect on mistakes to learn better.
Secondly, Customer Focus. Study the market your business is catering to. Learn their demands,
the quality they are looking for and monitor the customer traffic. Thirdly, getting feedback. This
is one important tool which helps you measure your standing with the customer. An entrepreneur
should keep in contact with an expert for constant feedback on what is going right or what needs
to be done improve a particular section. Not only this, customer feedback also needs to be in the
limelight, which helps an entrepreneur use innovative ideas, for his product according to the
demand. Fourthly, Networking. In business you are judged by the company you keep. Small
businesses always need assistance. It is important to cash every opportunity. An entrepreneur can
make contact through the business meetings or parties which lets you meet important people
from different aspects of business who can help a business grow.
Concluding the discussion.
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For an entrepreneurship his business is a vehicle for discovering and expressing his
unique talent and his passion to succeed. For a small business owner needs more drive and a
successful entrepreneur to have the constant determination to achieve success for his business.
Types of Entrepreneur
The literature has distinguished among a number of different types of entrepreneurs, for
instance:
Social entrepreneur
A social entrepreneur is motivated by a desire to help, improve and transform social,
environmental, educational and economic conditions. Key traits and characteristics of highly
effective social entrepreneurs include ambition and a lack of acceptance of the status quo or
accepting the world "as it is". The social entrepreneur is driven by an emotional desire to address
some of the big social and economic conditions in the world, for example, poverty and
educational deprivation, rather than by the desire for profit. Social entrepreneurs seek to develop
innovative solutions to global problems that can be copied by others to enact change. [4]
Social entrepreneurs act within a market aiming to create social value through the
improvement of goods and services offered to the community. Their main aim is to help offer a
better service improving the community as a whole and are predominately run as nonprofit
schemes. Zahra et al. (2009: 519) said that “social entrepreneurs make significant and diverse
contributions to their communities and societies, adopting business models to offer creative
solutions to complex and persistent social problems”.
Serial entrepreneur
A serial entrepreneur is one who continuously comes up with new ideas and starts new
businesses.[5] In the media, the serial entrepreneur is represented as possessing a higher
propensity for risk, innovation and achievement.[6]
Lifestyle entrepreneur
A lifestyle entrepreneur places passion before profit when launching a business in order
to combine personal interests and talent with the ability to earn a living. Many entrepreneurs may
be primarily motivated by the intention to make their business profitable in order to sell to
shareholders.[examples needed] In contrast, a lifestyle entrepreneur intentionally chooses a
business model intended to develop and grow their business in order to make a long-term,
sustainable and viable living working in a field where they have a particular interest, passion,
talent, knowledge or high degree of expertise.[7] A lifestyle entrepreneur may decide to become
self-employed in order to achieve greater personal freedom, more family time and more time
working on projects or business goals that inspire them. A lifestyle entrepreneur may combine a
hobby with a profession or they may specifically decide not to expand their business in order to
remain in control of their venture. Common goals held by the lifestyle entrepreneur include
earning a living doing something that they love, earning a living in a way that facilitates self-
employment, achieving a good work/life balance and owning a business without
shareholders.[further explanation needed] Many lifestyle entrepreneurs are very dedicated to
their business and may work within the creative industries or tourism industry,[8] where a
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passion before profit approach to entrepreneurship often prevails. While many entrepreneurs may
launch their business with a clear exit strategy, a lifestyle entrepreneur may deliberately and
consciously choose to keep their venture fully within their own control. Lifestyle
entrepreneurship is becoming increasing popular as technology provides small business owners
with the digital platforms needed to reach a large global market.[9] Younger lifestyle
entrepreneurs, typically those between 25 and 40 years old, are sometimes referred to as Treps.
Cooperative entrepreneur
A cooperative entrepreneur doesn't just work alone, but rather collaborates with other
cooperative entrepreneurs to develop projects, particularly cooperative projects. Each
cooperative entrepreneur might bring different skill sets to the table, but collectively they share
in the risk and success of the venture.
Theory-based Typologies
Recent advances in entrepreneurship research indicate that the differences in
entrepreneurs and heterogeneity in their behaviors and actions can be traced back to their the
founder's identity. For instance, Fauchart and Gruber (2011, Academy of Management Journal)
have recently shown that -based on social identity theory - three main types of entrepreneurs can
be distinguished: Darwinians, Communitarians and Missionaries. These types of founders not
only diverge in fundamental ways in terms of their self-views and their social motivations in
entrepreneurship, but also engage fairly differently in new firm creation.
Levels of Entrepreneurial Development

Brad Sugars, identifies five different types or levels of entrepreneurial mindsets, patterns
of thinking, and belief systems.
They begin with the basic level of the employee – and an understanding that good employees
often evolve into great entrepreneurs but that to become an entrepreneur one has to first adopt a
perspective and seek out a role above and beyond that of an employee.
1. The employee sets goals mainly to impress others, to avoid confronting fears – including
the fear of personal freedom and success – and to conform to a comfort zone rather than
pushing to learn more and gain new experiences.
2. Because of self-imposed limitations, employees prefer to follow someone else’s game
plan, and they lack the desire to become a self-motivated and self-reliant entrepreneur.
3. They focus primarily on personal security and their emotional motivation derives from a
fear of insecurity and a desire to be within the comfort zone of a secure situation.
Those who want a greater sense of responsibility and control over their lives and have the
confidence to experiment with that possibility often rise up from the ground level of employee
status to the first level of entrepreneurship.
They do this by becoming self-employed.
Level One: The Self-Employed Mindset

The emotional driving force behind the self-employed person is not security but a desire
for greater control over his or her life, career, and destiny. Relinquishing that control to a boss
every day from nine to five is not their idea of happiness, and they believe that they could do
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their job just as well without an employer – and perhaps without the need for other employees.
They want more autonomy. They want to do things their own way. And they usually begin by
creating a situation where they do the same type of work they did while an employee, but they
figure out how to do it by themselves and for themselves.
Unfortunately, many of the primary objectives of the person setting off to become an
entrepreneur with the self-employment mindset are pitfalls or traps. Because they want to go it
alone, they often do so at their own peril.
By not taking help from others they not only cut themselves off from valuable talent,
intelligence, feedback, and experience that others could offer in the form of assistance, but they
also create a situation where they will never experience freedom.
Many small business owners with a strong do-it-yourself attitude only succeed at creating
a new job for themselves, not a new career or profitable company. And as a solo performer, their
job becomes all-consuming. They never get a day off, they always bring work home with them,
and they work overtime with no financial compensation. Their motto is “Why have someone else
do it when you can do it better yourself?” and they often promote their business by telling
customers “When you deal with this outfit you only deal directly with me.” Soon they get
burned-out, and a great majority of these self-employed people fail in a short amount of time and
wind up going back to work for someone else.
They make the mistake of not envisioning a business that will run by itself without their
constant supervision and handholding, and they don’t picture creating an enterprise that thrives
on involving others in a teamwork effort.
One of the greatest blunders is that these self-employed entrepreneurs try to replicate the
same job they had before, in the same area of experience, selling a product or service they
already know. While it may seem counterintuitive to strike out in a different direction and into
unfamiliar territory, that trajectory puts one into a position of learning, being open-minded, and
relying upon others for help. Those ingredients contribute to a recipe for entrepreneurial success
because they force one to evaluate the entire business system from a new and fresh perspective.
And they set the stage for working on the business without having to actually be physically in the
business on a day-to-day basis.
That premise of designing a business that works for its owner – rather than the owner
working for it all the time – is vital for becoming a real entrepreneur versus becoming simply the
most important employee of one’s own selfemployed venture. Those who understand that fact
can rise to the next level of entrepreneurship
Level Two: The Managerial Perspective

Those with a managerial outlook are often in a great position to succeed as entrepreneurs,
expect for two big misconceptions that lead to massive problems. Many managers believe that if
a business is not working, the solution lies in hiring more employees. They throw extra bodies at
the problem, but this only aggravates the situation because it fails to address the underlying root
cause of the difficulty or lack of profitability. Another mistaken belief that is common to this
mindset is that the route to success is through growth – not profit growth but overall structural
growth of the enterprise itself. Once again, bigger is not necessarily better unless and until the
fundamentals are sound and efficient. Growing larger to fix the problems of a small business
only generates a much bigger company with problems that are expanded, magnified, and much
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more expensive to remedy. Many managerial entrepreneurs go into bankruptcy thanks to

vigorous growth, but they never figure out why.
A third misstep common to the managerial attitude is that the entrepreneur wants to be
the boss, even if that means sacrificing the talent or potential of employees. To give orders and
be in charge requires no great skill or aptitude, but to be a leader – one who knows how to
inspire and train others to rise to greater heights – is a rare quality. Managers who become
leaders succeed because they accept the challenge and responsibility of ensuring that others
under their wings also succeed and flourish.
By getting the most out of employees, managers themselves are able to delegate aspects
of their business to others and set higher goals. Those who say they can’t find good employees
usually mean they lack what it takes to attract or create good employees – and as a consequence
they also lack what it takes to succeed as an entrepreneur. But those who not only manage but
also lead can rise to the next level and become owner/leaders – one step closer to the real
definition of an entrepreneur.
Level Three: The Attitude of Owner/Leader

The entrepreneur who attains the level of an owner/leader enjoys remarkable benefits by
knowing how to step aside and let the business – and those employees working in it – operate as
a profit center not reliant upon the owner’s constant hands-on participation. This kind of
entrepreneur has created an organization that is more self-sufficient and self-sustaining, and by
doing so has created more wealth, personal freedom, and free time.
Rather than being the only person who could get the job done the best, this lead4er has
passed that torch of responsibility and expertise along to others who now enjoy for themselves a
greater level of career achievement. The owner/leader can therefore focus not so much on sales
and revenues, but on net profits. While the business continues to run smoothly – and generate
more transactions – the owner/leader concentrates on fine tuning it for increased profitability
while letting others handle the day-to-day operational details.
Level Four: The Entrepreneurial Investor

With a business that generates profits, the entrepreneur who has succeeded this far can
begin to accept another exciting challenge, that of managing money so that it works to produce
more money. Investing for maximum returns involves smart leverage of assets, and the
entrepreneurial investor will often leverage the success of the first business to create a second or
third company based on the same model or system.
By franchising the original venture or buying other healthy businesses, the investor can
get into the career of not just selling basic products and services, but of selling entire businesses.
The goal, of course, is still to turn a profit. So rather than remaining at the helm of these
companies the investor will buy them, ensure that they have valuable equity or attractive allure
and potential, and then sell them to other entrepreneurs or would-be entrepreneurs. The focus
becomes finding, buying (and perhaps refurbishing) businesses, in the same way that a real estate
investor locates homes, rehabs them, and then flips them for a profit.
The challenge is to avoid falling back into the role of running a business as an
administrator or manager, and to meet this problem with a viable solution the entrepreneur will
typically appoint someone else to take the reins of the company as the president or CEO. Then
the investor becomes more of a director or silent partner who shares in the profits while enjoying
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the relief of not having to share the routine responsibilities of running the business from the
inside.
This all becomes possible because the entrepreneur has not just created a business but has
also designed excellent systems for keeping it going. Rather than dealing on the level of isolated
actions and reactionary tactics, in other words, the entrepreneurial investor has risen to the level
of broad and comprehensive strategies that work across all sorts of products, services, and
economic cycles. Working smart replaces working hard, and the rewards – both financial and
personal – are abundant.
Level Five: The True Entrepreneur

Having learned new things every step of the way and evolved through various stages of
entrepreneurial accomplishment and insight, it is possible to reach the ultimate goal and realize
one’s dreams in a really life-changing way. The true entrepreneur experiences a paradigm shift
that involves a four-step process of changed thinking:
#1: Idealization – Imagine gigantic, all-encompassing dreams for creating the ideal
world.
#2: Visualization – Picture the ideal world as a reality and begin to clarify this vision on
a daily basis, filling in more details each day.
#3: Verbalization – Begin to put words to the dream and talk of it as if it was already
happening. Talk about it to others as if it were real and continue to have a personal dialog
with the ideal to make it come true.
#4: Materialization – Because the effort and intention of designing and believing in the
ideal and the dream, things begin to fall into place and happen in a natural and automatic
way. The idea becomes a real and tangible fact that materializes in the world and
influences others while opening new doors to fresh opportunities and the birth of more
dreams.
The true entrepreneur is a dreamer whose dreams come true, and an income earner whose
income is passive. Money comes automatically from profitable ventures that feed success with
more success but do not require extraneous work. The money made does all the work for the
entrepreneur to create more money with a snowballing effect. These women and men profit in all
situations and add to their wealth by acquiring more paper assets, more profit centers, and more
entrepreneurial power.
Twelve Characteristics of Entrepreneur

By examining the five phases or levels of entrepreneurship we gain a better
understanding of the fundamentals that distinguish ordinary entrepreneurs from the extraordinary
ones. And we begin to notice certain traits that are common to all successful entrepreneurs.
While – quite naturally – individual entrepreneurs have many unique traits that are not
common to other entrepreneurs, all entrepreneurs do share a kindred spirit, a certain type of
constitution and outlook, and a special drive and willingness. Rather than elaborating on the
many differences within this broadly diverse demographic, it is more helpful to look at those
aspects of similarity.
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Here are 12 characteristics that are found within all successful entrepreneurs – and
without which most people will fall short of what it takes to succeed in an entrepreneurial
enterprise.
#1) Confident
Confidence is a hallmark of the entrepreneur. Not all of us are born with confidence, but
that does not mean we are not capable of it. Many confident women and men gain their sense of
self esteem and faith in their ability to greet challenges by acting – even when they lack the
confidence – and then gaining strength and belief in themselves by seeing the results and gaining
the praise and respect of others.
#2) Feels a Sense of Ownership

Taking responsibility for getting things done – and doing them with care and attention –
means to act like an owner. Rather than viewing a problem as someone else’s, the entrepreneur
sees it as his or her own and takes pride in finding a solution, leaving things in better shape then
they were before encountering them, and improving upon situations rather than leaving them
unattended. While a sense of ownership makes for a stellar employee, the entrepreneur knows
that the goal is not to be owned by the enslavement of too much responsibility. Rather than
controlling situations in an attempt to possess them, the entrepreneur teaches other people how to
take charge. In that way the clever entrepreneur uses individual accountability in the ultimate
pursuit of profitability, teamwork, and overall success.
#3) Able to Communicate

Entrepreneurs recognize that the most important part of any business is the human
element. Human resources – whether in the form of clients, employees, or strategic partners – are
what makes or breaks a business, and communication is the key to successful relationships with
people. The entrepreneur works to hone communication skills, whether those are written, spoken,
or non-verbal messages conveyed through body language. And to support communication, he or
she will take advantage of all available tools and resources. Those might include foreign
language or public speaking classes, computer and telecom technology, search engine
optimization or neuro-linguistic programming as it relates to sales and marketing, or specialized
writing such as that needed for grants, business proposals, mission statements, or policy manuals.
Above all, the entrepreneur develops a keen ability to listen and hear what others are trying to
say, because the best communicators got that way by first being the best listeners.
#4) Passionate about Learning

Entrepreneurs are often “autodidactic” learners, which means that much of what they
know they learned not in a formal classroom setting but instead on their own by seeking out
information, asking questions, and doing personal reading and research. They also are quick to
learn from their own mistakes, which mean they are less prone to keep repeating them due to
arrogance, ego, or blindness to one’s own faults, shortcomings, or errors in judgement. To teach
is to learn. And to lead, train, and impart experience to others the entrepreneur is constantly
striving to learn more and get better educated. Because of the passion for education, true
entrepreneurs surround themselves with people who either know more than they do or know
things that are different from what they know. They entertain the views of others and
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perspectives that may be unlike their own, for instance, in order to be better students of human
nature. In this way they continue to enrich themselves with knowledge while also making a
concerted effort to grow that knowledge by sharing it with others who are also front row students
of life’s valuable and unlimited lessons.
#5) Team Player

Those who go into business for themselves but do not utilize teamwork wind up without
the team but still have all the work to get done. They shoulder the whole burden for themselves,
and wind up just trading their old job for a new and more demanding one – in an attempt to be
self-employed. But the new venture carries greater personal and financial risks. On the other
hand, team players know how to succeed by employing the physics of interpersonal synergy and
dynamic relationships. One twig can be easily snapped, but a bundle of those small twigs
becomes stronger than the sum of its individual parts and can be impossible to bend, much less
break. The same goes for businesses, and successful entrepreneurs leverage teamwork to get the
heavy lifting done without breaking stride.
#6) System-Oriented
Like mathematical formulas, good systems allow us to reproduce great results every time
– with less and less exertion of energy or resources. Entrepreneurs rely upon systems before they
rely upon people, and they look for system based solutions before searching for human resource
solutions. If the person gets the job done but falls sick or leaves, the job is threatened. But if a
system is created to get the job done, anyone can step in and follow the blueprint to
get the desired result. Similarly, when troubleshooting and problem solving, the entrepreneur
will first examine and study the system – because a flaw in the system will produce a flawed
outcome each and every time. Designing, implementing, and perfecting systems is one of the
most useful and rewarding skills of an entrepreneur.
#7) Dedicated
Entrepreneurs dedicate themselves to the fulfillment of their plans, visions, and dreams,
and that tenacity of purpose generates electricity throughout the whole organization. One of the
biggest reasons that companies fail is because they lose focus. Target a goal, clarify the
objective, refine the brand, and narrow the margin of error. Regardless of what the effort might
involve, an entrepreneur brings a single-minded dedication to the task by being committed to a
positive outcome and ready and willing to do the needful. No matter what that might means in
terms of rising to meet a challenge or acting above and beyond the call of duty, the entrepreneur
shows steadfast dedication.
#8) Grateful
Being grateful for what we have opens us up to receive more, and one reason that is true
is because those who are grateful appreciate what they are given. They respect it and nurture it.
They do their best to make it grow instead of allowing it to dwindle away due to neglect.
Entrepreneurs learn to take nothing for granted in this world. That gives them the agility and
flexibility to adapt to changes and demands, while it also invests in them a thankfulness that
reminds them that riches and wealth are not about “stuff”, but are about fulfillment, satisfaction,
and the pleasure that comes from one’s accomplishments and contributions.
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#9) Optimistic
A positive outlook is essential for the entrepreneur, who learns to see setbacks as bargain
priced tuition for the valuable business lessons gained through firsthand experience. Past
shortcomings, failures, or disappointments are relegated to the past so that they cannot continue
to haunt the present or obstruct the future. And when things go right and business prospers, this
further fuels the optimism and positive mindset of an entrepreneur, helping to give impetus and
momentum for greater accomplishments and increased hopefulness.
#10) Gregarious
Because business is all about people, entrepreneurs tend to be socially outgoing. They get
excited about sharing ideas, products, and services, and that excitement is contagious to their
employees, clients, friends, and other contacts both within and beyond the business sphere. But
women and men who work hard as entrepreneurs also relish the unique opportunity to have fun
doing something that they love as their primary vocation. Human resource experts, career
counselors, and business psychologists all agree that those who do jobs they enjoy and are good
at, have higher rates of success and broader measures of satisfaction. Entrepreneurs know that
firsthand, from their own experience, and they tend to be a fun-loving group of people both on
and off the job.
#11) A Leader by Example

Entrepreneurs not only lead themselves through self-motivation as self-starters who jump into
tasks with enthusiasm, but they are also skilled at leading others. They know the importance of
teamwork, and they understand the need to appreciate others, support them, and reward them
accordingly. True leaders do not become indispensable, otherwise things fall apart in their
absence and they can never rise to the highest level of entrepreneurial freedom and prosperity.
Neither do they squander the potential of those working under their guidance. As renowned
business consultant and retired United States Air Force Major General Perry M. Smith once
wrote, “Leaders who share their power and their time can accomplish extraordinary things. The
best leaders understand that leadership is the liberation of talent; hence they gain power not only
by constantly giving it away, but also by not grabbing it back.”
#12) Not Afraid of Risk or Success

Many people could be successful if they only took chances. And many people who do
take chances and become somewhat successful find the realization of their dreams an
overwhelming possibility, so they sabotage their continued success by retreating back into a
comfort zone of smallness. As discussed earlier, the employee mindset is preoccupied with a
need for security. Those who cling to what is familiar to them – even if it means the denial of
their dreams – lack the perseverance and ambition that the real entrepreneur exhibits.
Entrepreneurs are not immune to fear. But they prioritize their approach to life so that the fear of
failure, frustration, boredom, drudgery, and dissatisfaction far outweighs the lingering fear of
success.
Types of Entrepreneurships
Steve Blank clearly describes four different types:
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Small Business Entrepreneurship

Today, the overwhelming number of entrepreneurs and startups in the United
States are still small businesses. There are 5.7 million small businesses in the U.S. They
make up 99.7% of all companies and employ 50% of all non-governmental workers.
Small businesses are grocery stores, hairdressers, consultants, travel agents,
internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone
who runs his/her own business. They hire local employees or family. Most are barely
profitable. Their definition of success is to feed the family and make a profit, not to take
over an industry or build a $100 million business. As they can’t provide the scale to
attract venture capital, they fund their businesses via friends/family or small business
loans.
Scalable Startup Entrepreneurship

Unlike small businesses, scalable startups are what Silicon Valley entrepreneurs
and their venture investors do. These entrepreneurs start a company knowing from day
one that their vision could change the world. They attract investment from equally crazy
financial investors – venture capitalists. They hire the best and the brightest. Their job is
to search for a repeatable and scalable business model. When they find it, their focus on
scale requires even more venture capital to fuel rapid expansion.
Scalable startups in innovation clusters (Silicon Valley, Shanghai, New York,
Bangalore, Israel, etc.) make up a small percentage of entrepreneurs and startups but
because of the outsize returns attract almost all the risk capital (and press.)
Large Company Entrepreneurship

Large companies have finite life cycles. Most grow through sustaining innovation,
offering new products that are variants around their core products. Changes in customer
tastes, new technologies, legislation, new competitors, etc. can create pressure for more
disruptive innovation – requiring large companies to create entirely new products sold
into new customers in new markets. Existing companies do this by either acquiring
innovative companies or attempting to build a disruptive product inside. Ironically, large
company size and culture make disruptive innovation extremely difficult to execute.
Social Entrepreneurship
Social entrepreneurs are innovators who focus on creating products and services
that solve social needs and problems. But unlike scalable startups their goal is to make
the world a better place, not to take market share or to create to wealth for the founders.
They may be nonprofit, for-profit, or hybrid.
Entrepreneurship versus Intrapreneurship
Unlike the entrepreneur, the intrapreneur acts within an existing organization. The intrapreneur is
the revolutionary inside the organization, who fights for change and renewal from within the
system. This may give rise to conflicts within the organization, so respect is the necessary key in
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order to channel these conflicts and transform them into positive aspects for the organization.
Even though intrapreneurs benefit from using the resources of the organization for the
implementation of the emerging opportunities, there are several motives why innovation is more
difficult to implement in an existing organization, such as
1. The size: the bigger the organization the more difficult it is to have an overview of the
actions of every employee
2. Lack of communication: Specialization and separation, help in concentrating on the areas of
interest, but hinder communication.
3. Internal competition: Internal competition amplifies the problem because instead of sharing
the knowledge with others it borders the knowledge sharing. Everyone wants to keep the
information for themselves.
4. Feedback received in case of success/mistake: Costs in case of failure are too great and the
reward for a successful outcome too small. Intrapreneurs must be allowed to commit
mistakes, because such mistakes are an inevitable part in the entrepreneurial process. The
recognition of success is also very rare. No company provides payment in advance for what
an entrepreneur might accomplish, but a lot of them like to talk about the concept of
intapreneurship and expected their employees to get involved and assume their risk. But
finally, when motivated employees get involves and have success their only reward is a small
bonus.
5. Dullness: Many companies are slow and reluctant to change. Intrapreneurs bump many times
into the well known sentence “We always did it this way”, which leaves little or no space to
creativity. The willingness to try new things appears only when the company's shortcomings
become apparent, but even so they don’t give room to an innovative leadership.
6. •Hierarchies: Organizational hierarchies compel employees to ask permission for actions that
fall outside their daily duties. The more complex the hierarchy the more difficult it is to
impose change. Hierarchies have also tended to create a short-term thinking. Employees on
lower hierarchical levels have a “Victim-Mentality” due to a reduced area of action and
reduced responsibilities.
Those who wish to implement innovative ideas should first consider what the best option for
them is: as an intrapreneur, as part of an existing organization, or an entrepreneur in a newly
established company.
In order to give an answer to this question an analysis of the advantages and disadvantages of
both concepts is required. The table below helps someone decide what type of business best suits
him after confronting him with the advantages and disadvantages that await him.
Entrepreneurship and intrapreneurship: advantages and

disadvantages
Advantages of Entrepreneurship Disadvantages of Entrepreneurship
1. You are your own boss - independency 1. Money pressure – giving up on the security
2. The income increases of a regular paycheck
3. You have the chance to be original 2. Less benefits as the business is new
4. You have part of excitement and adventure 3. Long working hours
5. There are a lot of possibilities 4. Mistakes are magnified
6. Salary potential – you decide upon your 5. All decisions must be made alone
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Advantages of Entrepreneurship Disadvantages of Entrepreneurship

own salary
Advantages of Intrapreneurship Disadvantages of Intrapreneurship

1. Ability to stay in a friendly, well known 1. Reward may not be up to expectation
environment 2. Innovation may not be appreciated
2. Practicing your skills within an accordingly
organization – lower risk 3. You can be innovative but to a certain limit
3. Using companies resources, good name, – you are not your own boss
knowledge
4. Access to customers, infrastructure
Entrepreneurship and intrapreneurship: similarities and differences

.
Similarities Differences
1. Both involve opportunity recognition and 1. In start-up entrepreneurship, the
definition. entrepreneur takes the risk in
2. Both require a unique business concept that intrapreneurship and the company takes the
takes the form of a product, process, or risk other than career- related risk.
service. 2. In start-up the individual entrepreneur
3. Both are driven by an individual champion owns the concept and business in
who works with a team to bring the intrapreneurship; the company typically
concept to fruition. owns the concept and intellectual rights
4. Both require that the entrepreneur be able with the individual entrepreneur having
to balance vision with managerial skill, little or no equity in the venture at all.
passion with pragmatism, and 3. In a start-up potential rewards for the
proactiveness with patience. individual entrepreneur are theoretically
5. Both involve concepts that are most unlimited where in intrapreneurship an
vulnerable in the formative stage, and that organizational structure is in place to limit
require adaptation over time. rewards/compensation to the entrepreneur/
6. Both entail a window of opportunity within employee.
which the concept can be successfully 4. In a start-up venture, one strategic gaffe
capitalized upon. could mean instant failure; in
7. Both are predicated on value creation and intrapreneurship the organization has more
accountability to a customer. flexibility for management errors.
8. Both entail risk and require risk 5. In a start-up the entrepreneur is subject or
management strategies. more susceptible to outside influences; in
9. Both require the entrepreneur to develop intrapreneurship the organization is more
creative strategies for leveraging resources. insulated from outside forces or influence
10. Both involve significant ambiguity.
11. Both require harvesting strategies.
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Types of Business
There are many forms of business which vary by jurisdiction. A few common ones are
Sole proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type
of business entity that is owned and run by one individual and in which there is no legal
distinction between the owner and the business. The owner receives all profits (subject to
taxation specific to the business) and has unlimited responsibility for all losses and debts. Every
asset of the business is owned by the proprietor and all debts of the business are the proprietor's.
This means that the owner has no less liability than if they were acting as an individual instead of
as a business
What is a Sole Proprietorship?
With more than 17 million operating in the United States, nearly 70 percent of
businesses operate as sole proprietorships. In addition to the relative simplicity
compared to large corporations, opening a sole proprietorship is a low-cost
method of entering into the business world. From consultants and free lancers to
independent contractors, nearly anyone can create a sole proprietorship.
As the name suggests, “sole proprietorship” refers to a business that is owned by a

single owner and should not be confused with a corporation. There are no
corporate taxes involved and the sole proprietor pays income tax on the profits
generated. The person who organized the business pays personal income taxes on
the profits made. This makes the accounting procedure relatively simple for the
sole proprietor, who also enjoys complete autonomy in terms of making business
decisions.
Setting up a sole proprietorship is easy. One of the main steps is to obtain a local
business license (a sales tax permit may also be required). For certain businesses,
such as restaurants or legal practices, you may need additional local or state
licenses. Legal regulations and licenses aside, there are other major factors to
consider when setting up a sole proprietorship. You will have to create a business
plan, develop marketing and advertising campaigns, set up a budget, and find
ways to fund your business.
Advantages and Disadvantages of a sole proprietorship
Many business owners choose to operate as a sole proprietorship to alleviate the

difficult tax procedures that go along with other forms of operation. As a sole
proprietor, you would simply have to file an individual income tax return (IRS
Form 1040) including your business losses and profits. There are no restrictions
on the number of people you can hire, and from the tax and legal perspective there
is no distinction between you and your business. You can therefore hire as many
people as you want and also recruit independent contractors if need be. Being in
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complete control of their business, sole proprietors make all the business
decisions keeping law in mind.
Sole proprietorship is not for every business owners especially business owners
that are not willing to assume all risks. Unlike a corporation or LLC, your
business doesn’t exist as a separate legal entity. All your personal wealth and
assets are linked to the business. Another downside is the inability to raise capital
easily. Proprietors cannot sell shares the way other corporations do, so they have
to seek out alternative methods to raise the necessary capital to expand their
business.
Choosing the best business structure will ultimately impact the success of your
business. Setting up a sole proprietorship is the easy and quick way to setup a
business, but may not be the best structure for your operation. Make sure you
weigh all the pros and cons before deciding if this structure will work for you.
Public Limited Company

A public limited company (legally abbreviated to PLC or plc) is a kind of public
company (publicly held company) in the United Kingdom, the Republic of Ireland, and other
Commonwealth jurisdictions. It is a limited (liability) company whose shares are freely sold and
traded to the public, with a minimum share capital of £50,000 and the letters PLC after its
name.[1] Similar companies in the United States are called publicly traded companies.
A PLC can be either an unlisted or listed company on the stock exchanges. In the United
Kingdom, a public limited company usually must include the words "public limited company" or
the abbreviation "PLC" or "plc" at the end and as part of the legal company name. Welsh
companies may instead choose to end their names with cwmni cyfyngedig cyhoeddus or c.c.c.[2]
However, some public limited companies (mostly nationalised concerns) incorporated under
special legislation are exempted from bearing any of the identifying suffixes.
Non-Governmental Organization (NGO)

A non-governmental organization (NGO) is a legally constituted organization created by
natural or legal persons that operates independently from any form of government. The term
originated from the United Nations (UN), and is normally used to refer to organizations that are
not a part of the government and are not conventional for-profit business. In the cases in which
NGOs are funded totally or partially by governments, the NGO maintains its non-governmental
status by excluding government representatives from membership in the organization. The term
is usually applied only to organizations that pursue wider social aims that have political aspects,
but are not openly political organizations such as political parties.
The number of internationally operating NGOs is estimated at 40,000.[1] National
numbers are even higher: Russia has 277,000 NGOs;[2] India is estimated to have around 3.3
million NGOs in year 2009, which is one NGO per less than 400 Indians, and many times the
number of primary schools and primary health centres in India.[3][4]
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Limited Company (LTD)

A limited company is a company in which the liability of the members or subscribers of
the company is limited to what they have invested or guaranteed to the company. Limited
companies may be limited by shares or by guarantee. And the former of these, a limited company
limited by shares, may be further divided into public companies and private companies. Who
may become a member of a private limited company is restricted by law and by the company's
rules. In contrast anyone may buy shares in a public limited company.
Limited companies can be found in most countries, although the detailed rules governing
them vary widely. It is also common for a distinction to be made between the publicly tradable
companies of plc type (for example, the German Aktiengesellschaft (AG), Czech a.s. and the
Mexican, French, Polish and Romanian S.A.), and the "private" types of company (such as the
German GmbH, Polish Sp. z o.o., the Czech s.r.o. and Slovak s.r.o.).
Limited Liability Company (LLC)

A limited liability company (LLC) is a flexible form of enterprise that blends elements of
partnership and corporate structures. It is a legal form of company that provides limited liability
to its owners in the vast majority of United States jurisdictions. LLCs do not need to be
organized for profit.
Private Company Limited by Guarantee

A company that does not have share capital, but is guaranteed by its members who agree to
pay a fixed amount in the event of the company's liquidation. Charitable organisations often
incorporate using this form of limited liability. Another example is the Financial Services
Authority. In Australia, only an unlisted public company can be limited by guarantee.
Private company limited by shares

Has shareholders with limited liability and its shares may not be offered to the general public.
Shareholders of private companies limited by shares are often bound to offer the shares to their
fellow shareholders prior to selling them to a third party.
Unlimited Company
An unlimited company or private unlimited company is a hybrid company incorporated
either with or without a share capital (and similar to its limited company counterpart) but where
the liability of the members or shareholders is not limited - that is, its members or shareholders
have a joint, several and unlimited obligation to meet any insufficiency in the assets of the
company in the event of the company's formal liquidation. The joint, several and unlimited
liability of the members or shareholders of the company to meet any insufficiency in the assets of
the company (to settle its outstanding liabilities if any exist) only applies upon the formal
liquidation of the company. Therefore, prior to any such formal liquidation of the company, any
creditors or security holders of the company may only have recourse to the assets of the company
and not to those of its members or shareholders.
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General Partnership
In the commercial and legal parlance of most countries, a general partnership (the basic form
of partnership under common law), refers to an association of persons or an unincorporated
company with the following major features:
1. Created by agreement, proof of existence and estoppel.
2. Formed by two or more persons
3. The owners are all personally liable for any legal actions and debts the company may face
It is a partnership in which partners share equally in both responsibility and liability.[1]
Limited liability partnership

A limited liability partnership (LLP) is a partnership in which some or all partners
(depending on the jurisdiction) have limited liability. It therefore exhibits elements of
partnerships and corporations. [1] In an LLP, one partner is not responsible or liable for another
partner's misconduct or negligence. This is an important difference from that of an unlimited
partnership. In an LLP, some partners have a form of limited liability similar to that of the
shareholders of a corporation. [2] In some countries, an LLP must also have at least one "general
partner" with unlimited liability. Unlike corporate shareholders, the partners have the right to
manage the business directly. In contrast, corporate shareholders have to elect a board of
directors under the laws of various state charters. The board organizes itself (also under the laws
of the various state charters) and hires corporate officers who then have as "corporate"
individuals the legal responsibility to manage the corporation in the corporation's best interest.
An LLP also contains a different level of tax liability from that of a corporation.
Limited liability partnerships are distinct from limited partnerships in some countries, which
may allow all LLP partners to have limited liability, while a limited partnership may require at
least one unlimited partner and allow others to assume the role of a passive and limited liability
investor. As a result, in these countries, the LLP is more suited for businesses where all investors
wish to take an active role in management.
There is considerable confusion between LLPs as constituted in the U.S. and that introduced
in the UK in 2001 and adopted elsewhere — see below — since the UK LLP is, despite the
name, specifically legislated as a Corporate body rather than a Partnership.
Limited partnership
A limited partnership is a form of partnership similar to a general partnership, except that in
addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is
a partnership in which only one partner is required to be a general partner.[1]
The GPs are, in all major respects, in the same legal position as partners in a conventional
firm, i.e. they have management control, share the right to use partnership property, share the
profits of the firm in predefined proportions, and have joint and several liabilities for the debts of
the partnership.
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As in a general partnership, the GPs have actual authority as agents of the firm to bind all the
other partners in contracts with third parties that are in the ordinary course of the partnership's
business. As with a general partnership, "An act of a general partner which is not apparently for
carrying on in the ordinary course the limited partnership's activities or activities of the kind
carried on by the limited partnership binds the limited partnership only if the act was actually
authorized by all the other partners."[2]
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Money
Seed Money
Seed money, sometimes known as seed funding, friends and family funding or angel
funding is a securities offering whereby one or more parties that have some connection to a new
enterprise invest the funds necessary to start the business so that it has enough funds to sustain
itself for a period of development until it reaches either a state where it is able to continue
funding itself, or has created something of value so that it is worthy of future rounds of funding.
Seed money refers to the money invested. New seed money options are also emerging from
crowd funding.
Seed money is typically used to pay for such preliminary operations as market research
and product development. Investors are often the business founders themselves, using savings,
mortgage loan proceeds, or funds borrowed from family and friends. They may also be outside
angel investors, venture capitalists or accredited investors who are acquainted in some way with
the founders. Seed capital is not necessarily a large amount of money. Many people start up new
business ventures with $50,000 or less. Seed capital can be distinguished from venture capital in
that venture capital investments tend to involve significantly more money, an arm's length
transaction, and much greater complexity in the contracts and corporate structure that accompany
the investment. Seed funding involves a higher risk than normal venture capital funding since the
investor does not see any existing project to evaluate for funding. Hence the investments made
are usually lower (in the tens of thousands to the hundreds of thousands of dollars range) as
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against normal venture capital investment (in the hundreds of thousands to the millions of dollars
range), for similar levels of stake in the company.
Seed money may also come from crowd funding or from financial bootstrapping rather
than an offering.[citation needed] Bootstrapping in this context means making use of the cash
flow of an existing enterprise.
Investors make their decision whether to fund a project based on the perceived strength of
the idea and the capabilities, skills and history of the founders
Angel Investor – Angel Investing

An angel investor or angel (also known as a business angel or informal investor) is an
affluent individual who provides capital for a business start-up, usually in exchange for
convertible debt or ownership equity. A small but increasing number of angel investors organize
themselves into angel groups or angel networks to share research and pool their investment
capital
Angels typically invest their own funds, unlike venture capitalists, who manage the
pooled money of others in a professionally-managed fund.[1][2] Although typically reflecting
the investment judgment of an individual, the actual entity that provides the funding may be a
trust, business, limited liability company, investment fund, etc. The Harvard report[3] by
William R. Kerr, Josh Lerner, and Antoinette Schoar tables evidence that angel-funded startup
companies are less likely to fail than companies that rely on other forms of initial financing.
Angel capital fills the gap in start-up financing between "friends and family"—
(sometimes humorously given the acronym FFF, which stands for "friends, family and fools")
who provide seed funding—and venture capital. Although it is usually difficult to raise more
than a few hundred thousand dollars from friends and family, most traditional venture capital
funds are usually not able to consider investments under US$1–2 million.[4] Thus, angel
investment is a common second round of financing for high-growth start-ups, and accounts in
total for almost as much money invested annually as all venture capital funds combined, but into
more than 60 times as many companies (US$20.1 billion vs. $23.26 billion in the US in 2010,
into 61,900 companies vs. 1,012 companies).[5][6]
Of the US companies that received angel funding in 2007, the average capital raised was
about US$450,000[citation needed]. However, there is no “set amount” for angel investors, and
the range can go anywhere from a few thousand, to a few million dollars. In a large shift from
2009, in 2010 healthcare/medical accounted for the largest share of angel investments, with 30%
of total angel investments (vs. 17% in 2009), followed by software (16% vs. 19% in 2007),
biotech (15% vs. 8% in 2009), industrial/energy (8% vs. 17% in 2009), retail (5% vs. 8% in
2009) and IT services (5%).[5][7] Angel financing, while more readily available than venture
financing, is still extremely difficult to raise.[8] However some new models are developing that
are trying to make this easier.[9] Many companies who receive angel funding are required to file
a Form D with the Securities and Exchange Commission.
Crowd funding
Crowd funding or crowdfunding (alternately crowd financing, equity crowdfunding, or
hyper funding) describes the collective cooperation, attention and trust by people who network
and pool their money and other resources together, usually via the internet, to support efforts
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initiated by other people or organizations. Crowd funding occurs for any variety of purposes,
from disaster relief to citizen journalism to artists seeking support from fans, to political
campaigns, to funding a startup company, movie or small business or creating free software.
Another aspect of crowd funding is tied into the United States of America JOBS Act
which allows for a wider pool of smaller investors with fewer restrictions. The Act was signed
into law by President Obama on April 5, 2012. The U.S. Securities and Exchange Commission is
going to have approximately 270 days from the enactment date to set forth specific rules and
methods to ensure that funding will actually take place
Venture Capital
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk,
growth startup companies. The venture capital fund makes money by owning equity in the
companies it invests in, which usually have a novel technology or business model in high
technology industries, such as biotechnology, IT, software, etc. The typical venture capital
investment occurs after the seed funding round as growth funding round (also referred to as
Series A round) in the interest of generating a return through an eventual realization event, such
as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore,
all venture capital is private equity, but not all private equity is venture capital.
In addition to angel investing and other seed funding options, venture capital is attractive
for new companies with limited operating history that are too small to raise capital in the public
markets and have not reached the point where they are able to secure a bank loan or complete a
debt offering. In exchange for the high risk that venture capitalists assume by investing in
smaller and less mature companies, venture capitalists usually get significant control over
company decisions, in addition to a significant portion of the company's ownership (and
consequently value).
Venture capital is also associated with job creation (accounting for 2% of US GDP), the
knowledge economy, and used as a proxy measure of innovation within an economic sector or
geography. Every year, there are nearly 2 million businesses created in the USA, and only 600–
800 get venture capital funding. According to the National Venture Capital Association, 11% of
private sector jobs come from venture backed companies and venture backed revenue accounts
for 21% of US GDP.
It is also a way in which public and private actors can construct an institution that
systematically creates networks for the new firms and industries, so that they can progress. This
institution helps in identifying and combining pieces of companies, like finance, technical
expertise, know-hows of marketing and business models. Once integrated, these enterprises
succeed by becoming nodes in the search networks for designing and building products in their
domain.
Venture Capitalist
A venture capitalist is a person who invests in a business venture, providing capital for
start-up or expansion. Venture capitalists are looking for a higher rate of return than would be
given by more traditional investments.
Generally, venture capitalists are looking for returns of 25 percent and up.
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What's the difference between a venture capitalist and an angel

investor?
A venture capitalist is a professional investor. He or she manages a fund and is looking
for suitable investments for that fund. An angel investor is an individual who, while also looking
for a suitable investment, is also looking for a personal opportunity.
In other words, the venture capitalist may have no business experience applicable to the
industry your company is involved in, and is focused on the potential rate of return your
company can provide. An angel investor often has business experience relevant to your company
and is interested in adding value to your company, as well as making a return on his or her
investment.
Concept of Venture Capital

The term venture capital comprises of two words that is, “Venture” and “Capital”. Venture is a
course of processing, the outcome of which is uncertain but to which is attended the risk or
danger of “loss”. “Capital” means recourses to start an enterprise. To connote the risk and
adventure of such a fund, the generic name Venture Capital was coined.
Venture capital is considered as financing of high and new technology based enterprises. It is
said that Venture capital involves investment in new or relatively untried technology, initiated by
relatively new and professionally or technically qualified entrepreneurs with inadequate funds.
The conventional financiers, unlike Venture capitals, mainly finance proven technologies and
established markets. However, high technology need not be pre-requisite for venture capital.
Venture capital has also been described as ‘unsecured risk financing’. The relatively high risk of
venture capital is compensated by the possibility of high returns usually through substantial
capital gains in the medium term. Venture capital in broader sense is not solely an injection of
funds into a new firm, it is also an input of skills needed to set up the firm, design its marketing
strategy, organize and manage it. Thus it is a long term association with successive stages of
company’s development under highly risk investment conditions, with distinctive type of
financing appropriate to each stage of development. Investors join the entrepreneurs as co-
partners and support the project with finance and business skills to exploit the market
opportunities.
Venture capital is not a passive finance. It may be at any stage of business/production cycle, that
is, start up, expansion or to improve a product or process, which are associated with both risk and
reward. The Venture capital makes higher capital gains through appreciation in the value of such
investments when the new technology succeeds. Thus the primary return sought by the investor
is essentially capital gain rather than steady interest income or dividend yield.
The most flexible definition of Venture capital is-
“The support by investors of entrepreneurial talent with finance and business skills to exploit
market opportunities and thus obtain capital gains.”
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Venture capital commonly describes not only the provision of start up finance or ‘seed corn’
capital but also development capital for later stages of business. A long term commitment of
funds is involved in the form of equity investments, with the aim of eventual capital gains rather
than income and active involvement in the management of customer’s business.
Features of Venture Capital
High Risk
By definition the Venture capital financing is highly risky and chances of failure are high as it
provides long term start up capital to high risk-high reward ventures. Venture capital assumes
four types of risks, these are:
 Management risk - Inability of management teams to work together.

 Market risk - Product may fail in the market.
 Product risk - Product may not be commercially viable.
 Operation risk - Operations may not be cost effective resulting in increased cost
decreased gross margins.
High Tech
As opportunities in the low technology area tend to be few of lower order, and hi-tech projects
generally offer higher returns than projects in more traditional areas, venture capital investments
are made in high tech. areas using new technologies or producing innovative goods by using new
technology. Not just high technology, any high risk ventures where the entrepreneur has
conviction but little capital gets venture finance. Venture capital is available for expansion of
existing business or diversification to a high risk area. Thus technology financing had never been
the primary objective but incidental to venture capital.
Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through direct purchase
of shares, options, convertible debentures where the debt holder has the option to convert the
loan instruments into stock of the borrower or a debt with warrants to equity investment. The
funds in the form of equity help to raise term loans that are cheaper source of funds. In the early
stage of business, because dividends can be delayed, equity investment implies that investors
bear the risk of venture and would earn a return commensurate with success in the form of
capital gains.
Participation In Management
Venture capital provides value addition by managerial support, monitoring and follow up
assistance. It monitors physical and financial progress as well as market development initiative.
It helps by identifying key resource person. They want one seat on the company’s board of
directors and involvement, for better or worse, in the major decision affecting the direction of
company. This is a unique philosophy of “hands on management” where Venture capitalist acts
as complementary to the entrepreneurs. Based upon the experience other companies, a venture
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capitalist advise the promoters on project planning, monitoring, financial management, including
working capital and public issue. Venture capital investor cannot interfere in day today
management of the enterprise but keeps a close contact with the promoters or entrepreneurs to
protect his investment.
Length of Investment
Venture capitalist help companies grow, but they eventually seek to exit the investment in
three to seven years. An early stage investment may take seven to ten years to mature, while
most of the later stage investment takes only a few years. The process of having significant
returns takes several years and calls on the capacity and talent of venture capitalist and
entrepreneurs to reach fruition.
Illiquid Investment
Venture capital investments are illiquid, that is, not subject to repayment on demand or
following a repayment schedule. Investors seek return ultimately by means of capital gains when
the investment is sold at market place. The investment is realized only on enlistment of security
or it is lost if enterprise is liquidated for unsuccessful working. It may take several years before
the first investment starts to locked for seven to ten years. Venture capitalist understands this
illiquidity and factors this in his investment decisions
Venture Capital Investment Process

Venture capital investment process is different from normal project financing. In order to
understand the investment process a review of the available literature on venture capital finance
is carried out. Tyebjee and Bruno in 1984 gave a model of venture capital investment activity
which with some variations is commonly used presently.
As per this model this activity is a five step process as follows:
1. Deal Organization
2. Screening
3. Evaluation or Due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit
Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or investment
opportunities that he would consider for investing in. Deal may originate in various ways.
referral system, active search system, and intermediaries. Referral system is an important source
of deals. Deals may be referred to VCFs by their parent organisaions, trade partners, industry
associations, friends etc. Another deal flow is active search through networks, trade fairs,
conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in
developed countries like USA, is certain intermediaries who match VCFs and the potential
entrepreneurs.
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Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on
the basis of some broad criteria. For example, the screening process may limit projects to areas in
which the venture capitalist is familiar in terms of technology, or product, or market scope. The
size of investment, geographical location and stage of financing could also be used as the broad
screening criteria.
Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with
evaluating an investment proposal. The venture capitalists evaluate the quality of entrepreneur
before appraising the characteristics of the product, market or technology. Most venture
capitalists ask for a business plan to make an assessment of the possible risk and return on the
venture. Business plan contains detailed information about the proposed venture. The evaluation
of ventures by VCFs in India includes;
1. Preliminary evaluation: The applicant required to provide a brief profile of the proposed
venture to establish prima facie eligibility.
2. Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in
greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term
vision, urge to grow, managerial skills, commercial orientation.
VCFs in India also make the risk analysis of the proposed projects which includes: Product
risk, Market risk, Technological risk and Entrepreneurial risk. The final decision is taken in
terms of the expected risk-return trade-off as shown in Figure.
Deal Structuring:
In this process, the venture capitalist and the venture company negotiate the terms of the
deals, that is, the amount, form and price of the investment. This process is termed as deal
structuring. The agreement also include the venture capitalist’s right to control the venture
company and to change its management if needed, buyback arrangements, acquisition, making
initial public offerings (IPOs), etc. Earned out arrangements specify the entrepreneur’s equity
share and the objectives to be achieved.
Post Investment Activities:

Once the deal has been structured and agreement finalised, the venture capitalist
generally assumes the role of a partner and collaborator. He also gets involved in shaping of the
direction of the venture. The degree of the venture capitalist’s involvement depends on his
policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day
operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may
intervene, and even install a new management team.
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the
initial investment. They play a positive role in directing the company towards particular exit
routes. A venture may exit in one of the following ways:
There are four ways for a venture capitalist to exit its investment:
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1. Initial Public Offer (IPO)

2. Acquisition by another company
3. Re-purchase of venture capitalist’s share by the investee company
4. Purchase of venture capitalist’s share by a third party
The Venture Capital Financing Spectrum

The requirements of funds vary with the life cycle stage of the enterprise. Even before a
business plan is prepared the entrepreneur invests his time and resources in surveying the market,
finding and understanding the target customers and their needs. At the seed stage the
entrepreneur continue to fund the venture with his own or family funds. At this stage the funds
are needed to solicit the consultant’s services in formulation of business plans, meeting potential
customers and technology partners. Next the funds would be required for development of the
product/process and producing prototypes, hiring key people and building up the managerial
team. This is followed by funds for assembling the manufacturing and marketing facilities in that
order. Finally the funds are needed to expand the business and attaint the critical mass for profit
generation. Venture capitalists cater to the needs of the entrepreneurs at different stages of their
enterprises. Depending upon the stage they finance, venture capitalists are called angel investors,
venture capitalist or private equity supplier/investor.
Venture capital was started as early stage financing of relatively small but rapidly growing
companies. However various reasons forced venture capitalists to be more and more involved in
expansion financing to support the development of existing portfolio companies. With increasing
demand of capital from newer business, Venture capitalists began to operate across a broader
spectrum of investment interest. This diversity of opportunities enabled Venture capitalists to
balance their activities in term of time involvement, risk acceptance and reward potential, while
providing on going assistance to developing business.
Different venture capital firms have different attributes and aptitudes for different types of
Venture capital investments. Hence there are different stages of entry for different Venture
capitalists and they can identify and differentiate between types of Venture capital investments,
each appropriate for the given stage of the investee company, These are:-
1. Early Stage Finance
a. Seed Capital
b. Start up Capital
c. Early/First Stage Capital
d. Later/Third Stage Capital
2. Later Stage Finance
a. Expansion/Development Stage Capital

b. Replacement Finance
c. Management Buy Out and Buy ins
d. Turnarounds
e. Mezzanine/Bridge Finance
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Not all business firms pass through each of these stages in a sequential manner. For instance seed
capital is normally not required by service based ventures. It applies largely to manufacturing or
research based activities. Similarly second round finance does not always follow early stage
finance. If the business grows successfully it is likely to develop sufficient cash to fund its own
growth, so does not require venture capital for growth.
The table below shows risk perception and time orientation for different stages of venture capital
financing.
Financing Stage Period (funds locked Risk perception Activity to be financed

in years)
Early stage finance 7-10 Extreme For supporting a
Seed concept or idea or R &
D for product
development
Start up 5-9 Very high Initializing operations
or developing
prototypes
First stage 3-7 High Start commercial
production and
marketing
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Financing Stage Period (funds locked Risk perception Activity to be financed

in years)
Second stage 3-5 Sufficiently high Expand market &
growing working
capital need
Later stage finance 1-3 Medium Market expansion,
acquisition & product
development for profit
making company
Buy out-in 1-3 Medium Acquisition financing
Turnaround 3-5 Medium to high Turning around a sick
company
Mezzanine 1-3 Low Facilitating public
issue
1. Seed Capital
It is an idea or concept as opposed to a business. European Venture capital association defines

seed capital as “The financing of the initial product development or capital provided to an
entrepreneur to prove the feasibility of a project and to qualify for start up capital”.
The characteristics of the seed capital may be enumerated as follows:
 Absence of ready product market

 Absence of complete management team
 Product/ process still in R & D stage
 Initial period / licensing stage of technology transfer
Broadly speaking seed capital investment may take 7 to 10 years to achieve realization. It is the
earliest and therefore riskiest stage of Venture capital investment. The new technology and
innovations being attempted have equal chance of success and failure. Such projects, particularly
hi-tech, projects sink a lot of cash and need a strong financial support for their adaptation,
commencement and eventual success. However, while the earliest stage of financing is fraught
with risk, it also provides greater potential for realizing significant gains in long term. Typically
seed enterprises lack asset base or track record to obtain finance from conventional sources and
are largely dependent upon entrepreneur’s personal resources. Seed capital is provided after
being satisfied that the entrepreneur has used up his own resources and carried out his idea to a
stage of acceptance and has initiated research. The asset underlying the seed capital is often
technology or an idea as opposed to human assets (a good management team) so often sought by
venture capitalists.
Volume of Investment Activity

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It has been observed that Venture capitalist seldom make seed capital investment and these are
relatively small by comparison to other forms of venture finance. The absence of interest in
providing a significant amount of seed capital can be attributed to the following three factors:
1. Seed capital projects by their very nature require a relatively small amount of capital. The
success or failure of an individual seed capital investment will have little impact on the
performance of all but the smallest venture capitalist’s portfolio. Larger venture capitalists avoid
seed capital investments. This is because the small investments are seen to be cost inefficient in
terms of time required to analyze, structure and manage them.
2. The time horizon to realization for most seed capital investments is typically 7-10 years which is
longer than all but most long-term oriented investors will desire.
3. The risk of product and technology obsolescence increases as the time to realization is
extended. These types of obsolescence are particularly likely to occur with high technology
investments particularly in the fields related to Information Technology.
2. Start up Capital
It is the second stage in the venture capital cycle and is distinguishable from seed capital
investments. An entrepreneur often needs finance when the business is just starting. The start up
stage involves starting a new business. Here in the entrepreneur has moved closer towards
establishment of a going concern. Here in the business concept has been fully investigated and
the business risk now becomes that of turning the concept into product.
Start up capital is defined as: “Capital needed to finance the product development, initial
marketing and establishment of product facility. “
The characteristics of start-up capital are:
1. Establishment of company or business. The company is either being organized or is
established recently. New business activity could be based on experts, experience or a
spin-off from R & D.
2. Establishment of most but not all the members of the team. The skills and fitness to
the job and situation of the entrepreneur’s team is an important factor for start up finance.
3. Development of business plan or idea. The business plan should be fully developed yet
the acceptability of the product by the market is uncertain. The company has not yet
started trading.
In the start up preposition venture capitalists’ investment criteria shifts from idea to people
involved in the venture and the market opportunity. Before committing any finance at this stage,
Venture capitalist however, assesses the managerial ability and the capacity of the entrepreneur,
besides the skills, suitability and competence of the managerial team are also evaluated. If
required they supply managerial skills and supervision for implementation. The time horizon for
start up capital will be typically 6 or 8 years. Failure rate for start up is 2 out of 3. Start up needs
funds by way of both first round investment and subsequent follow-up investments. The risk
tends t be lower relative to seed capital situation. The risk is controlled by initially investing a
smaller amount of capital in start-ups. The decision on additional financing is based upon the
successful performance of the company. However, the term to realization of a start up investment
remains longer than the term of finance normally provided by the majority of financial
institutions. Longer time scale for using exit route demands continued watch on start up projects.
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Volume of Investment Activity
Despite potential for specular returns most venture firms avoid investing in start-ups. One reason
for the paucity of start up financing may be high discount rate that venture capitalist applies to
venture proposals at this level of risk and maturity. They often prefer to spread their risk by
sharing the financing. Thus syndicates of investor’s often participate in start up finance.
3. Early Stage Finance

It is also called first stage capital is provided to entrepreneur who has a proven product,
to start commercial production and marketing, not covering market expansion, de-risking and
acquisition costs.
At this stage the company passed into early success stage of its life cycle. A proven
management team is put into this stage, a product is established and an identifiable market is
being targeted.
British Venture Capital Association has vividly defined early stage finance as: “Finance
provided to companies that have completed the product development stage and require further
funds to initiate commercial manufacturing and sales but may not be generating profits.”
The characteristics of early stage finance may be:
1. Little or no sales revenue.
2. Cash flow and profit still negative.
3. A small but enthusiastic management team which consists of people with technical and
specialist background and with little experience in the management of growing business.
4. Short term prospective for dramatic growth in revenue and profits.
The early stage finance usually takes 4 to 6 years time horizon to realization. Early stage
finance is the earliest in which two of the fundamentals of business are in place i.e. fully
assembled management team and a marketable product. A company needs this round of finance
because of any of the following reasons:
1. Project overruns on product development.
2. Initial loss after start up phase.
The firm needs additional equity funds, which are not available from other sources thus
prompting venture capitalist that, have financed the start up stage to provide further financing.
The management risk is shifted from factors internal to the firm (lack of management, lack of
product etc.) to factors external to the firm (competitive pressures, in sufficient will of financial
institutions to provide adequate capital, risk of product obsolescence etc.)
At this stage, capital needs, both fixed and working capital needs are greatest. Further, since
firms do not have foundation of a trading record, finance will be difficult to obtain and so
Venture capital particularly equity investment without associated debt burden is key to survival
of the business.
The following risks are normally associated to firms at this stage:
1. The early stage firms may have drawn the attention of and incurred the challenge of a
larger competition.
2. There is a risk of product obsolescence. This is more so when the firm is involved in
high-tech business like computer, information technology etc.
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4. Second Stage Finance
It is the capital provided for marketing and meeting the growing working capital needs of an
enterprise that has commenced the production but does not have positive cash flows sufficient to
take care of its growing needs. Second stage finance, the second trench of Early State Finance is
also referred to as follow on finance and can be defined as the provision of capital to the firm
which has previously been in receipt of external capital but whose financial needs have
subsequently exploded. This may be second or even third injection of capital.
The characteristics of a second stage finance are:

1. A developed product on the market
2. A full management team in place
3. Sales revenue being generated from one or more products
4. There are losses in the firm or at best there may be a break even but the surplus generated
is insufficient to meet the firm’s needs.
Second round financing typically comes in after start up and early stage funding and so have
shorter time to maturity, generally ranging from 3 to 7 years. This stage of financing has both
positive and negative reasons.
Negative reasons include:
1. Cost overruns in market development.
2. Failure of new product to live up to sales forecast.
3. Need to re-position products through a new marketing campaign.
4. Need to re-define the product in the market place once the product deficiency is revealed.
Positive reasons include:
1. Sales appear to be exceeding forecasts and the enterprise needs to acquire assets to gear
up for production volumes greater than forecasts.
2. High growth enterprises expand faster than their working capital permit, thus needing
additional finance. Aim is to provide working capital for initial expansion of an enterprise
to meet needs of increasing stocks and receivables.
It is additional injection of funds and is an acceptable part of venture capital. Often provision for
such additional finance can be included in the original financing package as an option, subject to
certain management performance targets.
5. Later Stage Finance

It is called third stage capital is provided to an enterprise that has established commercial
production and basic marketing set-up, typically for market expansion, acquisition, product
development etc. It is provided for market expansion of the enterprise. The enterprises eligible
for this round of finance have following characteristics.
1. Established business, having already passed the risky early stage.
2. Expanding high yield, capital growth and good profitability.
3. Reputed market position and an established formal organization structure.
“Funds are utilized for further plant expansion, marketing, working capital or development of
improved products.” Third stage financing is a mix of equity with debt or subordinate debt. As it
is half way between equity and debt in US it is called “mezzanine” finance. It is also called last
round of finance in run up to the trade sale or public offer.
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Venture capitalist s prefer later stage investment vis a vis early stage investments, as the rate
of failure in later stage financing is low. It is because firms at this stage have a past performance
data, track record of management, established procedures of financial control. The time horizon
for realization is shorter, ranging from 3 to 5 years. This helps the venture capitalists to balance
their own portfolio of investment as it provides a running yield to venture capitalists. Further the
loan component in third stage finance provides tax advantage and superior return to the
investors.
There are four sub divisions of later stage finance.
1. Expansion / Development Finance
2. Replacement Finance
3. Buyout Financing
4. Turnaround Finance
Expansion / Development Finance

An enterprise established in a given market increases its profits exponentially by
achieving the economies of scale. This expansion can be achieved either through an organic
growth, that is by expanding production capacity and setting up proper distribution system or by
way of acquisitions. Anyhow, expansion needs finance and venture capitalists support both
organic growth as well as acquisitions for expansion.
At this stage the real market feedback is used to analyze competition. It may be found
that the entrepreneur needs to develop his managerial team for handling growth and managing a
larger business.
Realization horizon for expansion / development investment is one to three years. It is
favored by venture capitalist as it offers higher rewards in shorter period with lower risk. Funds
are needed for new or larger factories and warehouses, production capacities, developing
improved or new products, developing new markets or entering exports by enterprise with
established business that has already achieved break even and has started making profits.
Replacement Finance
It means substituting one shareholder for another, rather than raising new capital resulting in the
change of ownership pattern. Venture capitalist purchase shares from the entrepreneurs and their
associates enabling them to reduce their shareholding in unlisted companies. They also buy
ordinary shares from non-promoters and convert them to preference shares with fixed dividend
coupon. Later, on sale of the company or its listing on stock exchange, these are re-converted to
ordinary shares. Thus Venture capitalist makes a capital gain in a period of 1 to 5 years.
Buy – out / Buy – in Financing

It is a recent development and a new form of investment by venture capitalist. The funds
provided to the current operating management to acquire or purchase a significant share holding
in the business they manage are called management buyout.
Management Buy-in refers to the funds provided to enable a manager or a group of
managers from outside the company to buy into it.
It is the most popular form of venture capital amongst later stage financing. It is less risky
as venture capitalist in invests in solid, ongoing and more mature business. The funds are
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provided for acquiring and revitalizing an existing product line or division of a major business.
MBO (Management buyout) has low risk as enterprise to be bought have existed for some time
besides having positive cash flow to provide regular returns to the venture capitalist, who
structure their investment by judicious combination of debt and equity. Of late there has been a
gradual shift away from start up and early finance to wards MBO opportunities. This shift is
because of lower risk than start up investments.
Turnaround Finance
It is rare form later stage finance which most of the venture capitalist avoid because of higher
degree of risk. When an established enterprise becomes sick, it needs finance as well as
management assistance foe a major restructuring to revitalize growth of profits. Unquoted
company at an early stage of development often has higher debt than equity; its cash flows are
slowing down due to lack of managerial skill and inability to exploit the market potential. The
sick companies at the later stages of development do not normally have high debt burden but
lack competent staff at various levels. Such enterprises are compelled to relinquish control to
new management. The venture capitalist has to carry out the recovery process using hands on
management in 2 to 5 years. The risk profile and anticipated rewards are akin to early stage
investment.
Bridge Finance
It is the pre-public offering or pre-merger/acquisition finance to a company. It is the last round of

financing before the planned exit. Venture capitalist help in building a stable and experienced
management team that will help the company in its initial public offer. Most of the time bridge
finance helps improves the valuation of the company. Bridge finance often has a realization
period of 6 months to one year and hence the risk involved is low. The bridge finance is paid
back from the proceeds of the public issue.
Venture capital financing

Venture capital financing is a type of financing by venture capital: the type of private equity
capital is provided as seed funding to early-stage, high-potential, growth companies and more
often after the seed funding round as growth funding round (also referred as series A round) in
the interest of generating a return through an eventual realization event such as an IPO or trade
sale of the company.
Overview
To start a new startup company or to bring a new product to the market, the venture may
need to attract financial funding. There are several categories of financing possibilities. Smaller
ventures sometimes rely on family funding, loans from friends, personal bank loans or crowd
funding.
More ambitious projects that need more substantial funding may turn to angel investors -
private investors who use their own capital to finance a ventures’ need, or Venture Capital (VC)
companies that specialize in financing new ventures. VC firms may also provide expertise the
venture is lacking, such as legal or marketing knowledge.
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Venture capital financing process

There are five common stages of venture capital financing
1. The Seed stage
2. The Start-up stage
3. The Second stage
4. The Third stage
5. The Bridge/Pre-public stage
The number and type of stages may be extended by the VC firm if it deems necessary; this is
common[citation needed]. This may happen if the venture does not perform as expected due to
bad management or market conditions.
The following schematics shown here are called the process data models. All activities
that find place in the venture capital financing process are displayed at the left side of the model.
Each box stands for a stage of the process and each stage has a number of activities. At the right
side, there are concepts. Concepts are visible products/data gathered at each activity. This
diagram is according to the modeling technique founded by Professor Sjaak Brinkkemper of the
University of Utrecht in the Netherlands.
The Seed Stage
The Seed Stage
This is where the seed funding takes place. It is considered as the setup stage where a
person or a venture approaches an angel investor or an investor in a VC firm for funding for their
idea/product. During this stage, the person or venture has to convince the investor why the
idea/product is worthwhile. The investor will investigate into the technical and the economical
feasibility (Feasibility Study) of the idea. In some cases, there is some sort of prototype of the
idea/product that is not fully developed or tested.
If the idea is not feasible at this stage, and the investor does not see any potential in the
idea/product, the investor will not consider financing the idea. However if the idea/product is not
directly feasible, but part of the idea is worth for more investigation, the investor may invest
some time and money in it for further investigation.
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Example
A Dutch venture named High 5 Business Solution V.O.F. wants to develop a portal
which allows companies to order lunch. To open this portal, the venture needs some financial
resources, they also need marketeers and market researchers to investigate whether there is a
market for their idea. To attract these financial and non-financial resources, the executives of the
venture decide to approach ABN AMRO Bank to see if the bank is interested in their idea.
After a few meetings, the executives are successful in convincing the bank to take a look
in the feasibility of the idea. ABN AMRO decides to put a few experts for investigation. After
two weeks time, the bank decides to invest. They come to an agreement of invest a small amount
of money into the venture. The bank also decides to provide a small team of marketeers and
market researchers and a supervisor. This is done to help the venture with the realization of their
idea and to monitor the activities in the venture.
Risk
At this stage, the risk of losing the investment is tremendously high, because there are so
many uncertain factors. Research by J.C. Ruhnka and J.E. Young shows that the risk of losing
the investment for the VC firm is around 66.2% and the causation of major risk by stage of
development is 72%[citation needed]. The Harvard report[1] by William R. Kerr, Josh Lerner, and
Antoinette Schoar, however, shows evidence that angel-funded startup companies are less likely
to fail than companies that rely on other forms of initial financing.
The Start-up Stage
The Start-up Stage
If the idea/product/process is qualified for further investigation and/or investment, the

process will go to the second stage; this is also called the start-up stage. At this point many
exciting things happen. A business plan is presented by the attendant of the venture to the VC
firm. A management team is being formed to run the venture. If the company has a board of
directors, a person from the VC firms will take seats at the board of directors.
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While the organisation is being set up, the idea/product gets its form. The prototype is
being developed and fully tested. In some cases, clients are being attracted for initial sales. The
management-team establishes a feasible production line to produce the product. The VC firm
monitors the feasibility of the product and the capability of the management-team from the board
of directors.
To prove that the assumptions of the investors are correct about the investment, the VC
firm wants to see result of market research to see whether the market size is big enough, if there
are enough consumers to buy their product. They also want to create a realistic forecast of the
investment needed to push the venture into the next stage. If at this stage, the VC firm is not
satisfied about the progress or result from market research, the VC firm may stop their funding
and the venture will have to search for another investor(s). When the cause relies on handling of
the management in charge, they will recommend replacing (parts of) the management team.
Example
Now the venture has attracted an investor, the venture need to satisfy the investor for
further investment. To do that, the venture needs to provide the investor a clear business plan
how to realise their idea and how the venture is planning to earn back the investment that is put
into the venture, of course with a lucrative return.
Together with the market researchers, provided by the investor, the venture has to
determine how big the market is in their region. They have to find out who are the potential
clients and if the market is big enough to realise the idea.
From market research, the venture comes to know that there are enough potential clients
for their portal site. But there are no providers of lunches yet. To convince these providers, the
venture decided to do interviews with providers and try to convince them to join.
With this knowledge, the venture can finish their business plan and determine a pretty
good forecast of the revenue, the cost of developing and maintaining the site and the profit the
venture will earn in the following five years.
After reading the business plan and consulting the person who monitors the venture
activities, the investor decides that the idea is worth for further development.
Risk
At this stage, the risk of losing the investment is shrinking, because the uncertainty is becoming
clearer. The risk of losing the investment for the VC firm is dropped to 53.0%, but the causation
of major risk by stage of development becomes higher, which is 75.8%. This can be explained by
the fact because the prototype was not fully developed and tested at the seed stage. And the VC
firm has underestimated the risk involved. Or it could be that the product and the purpose of the
product have been changed during the development.
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The Second Stage
The Second Stage

At this stage, we presume that the idea has been transformed into a product and is being
produced and sold. This is the first encounter with the rest of the market, the competitors. The
venture is trying to squeeze between the rest and it tries to get some market share from the
competitors. This is one of the main goals at this stage. Another important point is the cost. The
venture is trying to minimize their losses in order to reach the break-even.
The management team has to handle very decisively. The VC firm monitors the
management capability of the team. This consists of how the management team manages the
development process of the product and how they react to competition.
If at this stage the management team is proven their capability of standing hold against the
competition, the VC firm will probably give a go for the next stage. However, if the management
team lacks in managing the company or does not succeed in competing with the competitors, the
VC firm may suggest for restructuring of the management team and extend the stage by redoing
the stage again. In case the venture is doing tremendously bad whether it is caused by the
management team or from competition, the venture will cut the funding.
Example
The portal site needs to be developed. (If possible, the development should be taken place
in house. If not, the venture needs to find a reliable designer to develop the site.) Developing the
site in house is not possible; the venture does not have this knowledge in house. The venture
decides to consult this with the investor. After a few meetings, the investor decides to provide the
venture a small team of web-designers. The investor also has given the venture a deadline when
the portal should be operational. The deadline is in three months.
In the meantime, the venture needs to produce a client portfolio, who will provide their
menu at the launch of the portal site. The venture also needs to come to an agreement on how
these providers are being promoted at the portal site and against what price.
After three months, the investor requests the status of development. Unfortunately for the
venture, the development did not go as planned. The venture did not make the deadline.
According to the one who is monitoring the activities, this is caused by the lack of decisiveness
by the venture and the lack of skills of the designers.
The investor decides to cut back their financial investment after a long meeting. The
venture is given another three months to come up with an operational portal site. Three designers
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are being replaced by a new designer and a consultant is attracted to support the executives’
decisions. If the venture does not make this deadline in time, they have to find another investor.
Luckily for the venture, with the come of the new designer and the consultant, the venture
succeeds in making the deadline. They even have two weeks left before the second deadline
ends.
Risk
At this stage, the risk of losing the investment still drops, because the venture is capable
to estimate the risk. The risk of losing the investment for the VC firm drops from 53.0% to
33.7%, and the causation of major risk by stage of development also drops at this stage, from
75.8% to 53.0%. This can be explained by the fact that there is not much developing going on at
this stage. The venture is concentrated in promoting and selling the product. That is why the risk
decreases.[3]
The Third Stage
The Third Stage

This stage is seen as the expansion/maturity phase of the previous stage. The venture tries
to expand the market share they gained in the previous stage. This can be done by selling more
amount of the product and having a good marketing campaign. Also, the venture will have to see
whether it is possible to cut down their production cost or restructure the internal process. This
can become more visible by doing a SWOT analysis. It is used to figure out the strength,
weakness, opportunity and the threat the venture is facing and how to deal with it.
Except that the venture is expanding, the venture also starts to investigate follow-up
products and services. In some cases, the venture also investigates how to expand the life-cycle
of the existing product/service.
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At this stage the VC firm monitors the objectives already mentioned in the second stage
and also the new objective mentioned at this stage. The VC firm will evaluate if the management
team has made the expected reduction cost. They also want to know how the venture competes
against the competitors. The new developed follow-up product will be evaluated to see if there is
any potential.
Example
Finally the portal site is operational. The portal is getting more orders from the working
class every day. To keep this going, the venture needs to promote their portal site. The venture
decides to advertise by distributing flyers at each office in their region to attract new clients.
In the meanwhile, a small team is being assembled for sales, which will be responsible
for getting new lunchrooms/bakeries, any eating-places in other cities/region to join the portal
site. This way the venture also works on expanding their market.
Because of the delay at the previous stage, the venture did not fulfil the expected target.
From a new forecast, requested by the investor, the venture expects to fulfil the target in the next
quarter or the next half year. This is caused by external issues the venture does not have control
of it. The venture has already suggested to stabilise the existing market the venture already owns
and to decrease the promotion by 20% of what the venture is spending at the moment. This is
approved by the investor.
Risk
At this stage, the risk of losing the investment for the VC firm drops with 13.6% to 20.1%, and
the causation of major risk by stage of development drops almost by half from 53.0% to 37.0%.
However at this stage it happens often that new follow-up products are being developed. The risk
of losing the investment is still decreasing. This may because the venture rely its income on the
existing product. That is why the percentage continuous drop.[4]
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The Bridge/Pre-public Stage
The Bridge/Pre-public Stage
In general this stage is the last stage of the venture capital financing process. The main goal of
this stage is to achieve an exit vehicle for the investors and for the venture to go public. At this
stage the venture achieves a certain amount of the market share. This gives the venture some
opportunities; for example:
1. Hostile take over
2. Merger with other companies
3. Keeping away new competitors from approaching the market
4. Eliminate competitors
Internally, the venture has to reposition the product and see where the product is positioned and
if it is possible to attract new Market segmentation. This is also the phase to introduce the
follow-up product/services to attract new clients and markets.
As we already mentioned, this is the final stage of the process. But most of the time, there will be
an additional continuation stage involved between the third stage and the Bridge/pre-public
stage. However there are limited circumstances known where investors made a very successful
initial market impact might be able to move from the third stage directly to the exit stage. Most
of the time the venture fails to achieves some of the important benchmarks the VC firms aimed.
Example
Now the site is running smoothly, the venture is thinking about taking over the
competitors’ website happen.nl. The site is promoting restaurants and is also doing business in
online ordering food. This proposal is being protested by the investor, because it may cost a lot
of the ventures’ capital. The investor suggests a merge instead.
To settle down their differences, the venture requested an external party to investigate
into the case. The result of the investigation was a take-over. After reading the investigation, the
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investor agrees to it and happen.nl is being taken over by the venture. With the take-over of a
competitor, the venture has expanded its services.
Seeing the ventures’ result, the investor comes to the conclusion that the venture still
have not reach the target that was expected, but seeing how the business is progressing, the
investor decides to extend its investment for another year.
Risk
At this final stage, the risk of losing the investment still exists. However, compared with the
numbers mentioned at the seed-stage it is far lower. The risk of losing the investment the final
stage is a little higher at 20.9%. This is caused by the number of times the VC firms may want to
expand the financing cycle, not to mention that the VC firm is faced with the dilemma of
whether to continuously invest or not. The causation of major risk by this stage of development
is 33%. This is caused by the follow-up product that is introduced.[5]
At Last
As mentioned in the first paragraph, a VC firm is not only about funding and lucrative returns,
but it offers also the non-funding issues like knowledge as well as for internal as for external
issues. Also what we see here the further the process goes, the less risk of losing investment the
VC firm is risking.
Stage at which investment made Risk of loss Causation of major risk by stage of development
The Seed-stage 66.2% 72.0%
The Start-up Stage 53.0% 75.8%
The Second Stage 33.7% 53.0%
The Third Stage 20.1% 37.0%
The Bridge/Pre-public Stage 20.9% 33.0%
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Initial Public Offering
An initial public offering (IPO) or stock market launch occurs when shares of stock in a
company are sold to the general public, on NASDAQ or other securities exchange for the first
time. Through this process, a private company transforms into a public company. The process is
used by companies to raise expansion capital, to possibly monetize the investments of early
private investors, and to become publicly traded enterprises. Most companies undertaking an IPO
do so with the assistance of an investment banking firm acting in the capacity of an underwriter.
Underwriters provide a valuable service, which includes help with correctly assessing the value
of shares (share price), and establishing a public market for shares (initial sale). Alternative
methods, such as the Dutch auction have also been explored. The most notable recent example of
this method is the Google IPO. China has recently emerged as a major IPO market, with several
of the largest IPO offerings taking place in that country.
Reasons for listing

When a company lists its securities on a public exchange, the money paid by the
investing public for the newly issued shares goes directly to the company (primary offering) as
well as to any early private investors who opt to sell all or a portion of their holdings (secondary
offering) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool
of potential investors to provide itself with capital for future growth, repayment of debt, or
working capital. A company selling common shares is never required to repay the capital to its
public investors. Those investors must endure the unpredictable nature of the open market to
price and trade their shares. After the IPO, when shares trade freely in the open market, money
passes between public investors. For early private investors who choose to sell shares as part of
the IPO process, the IPO represents an opportunity to monetize their investment. After the IPO,
once shares trade in the open market, investors holding large bocks of stock can either sell those
shares piecemeal in the open market, or sell a large block of shares directly to the public, at a
fixed price, through a secondary market offering. This type of offering is not dilutive, since no
new shares are being created.
Once a company is listed, it is able to issue additional common shares in a number of
different ways, one of which is the follow-on offering. This method provides capital for various
corporate purposes through the issuance of equity (see stock dilution) without incurring any debt.
This ability to quickly raise potentially large amounts of capital from the marketplace is a key
reason many companies seek to go public. An IPO accords several benefits to the previously
private company:
1. Enlarging and diversifying equity base
2. Enabling cheaper access to capital
3. Increasing exposure, prestige, and public image
4. Attracting and retaining better management and employees through liquid equity
participation
5. Facilitating acquisitions (potentially in return for shares of stock)
6. Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans,
etc.
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Disadvantages of an IPO
There are several disadvantages to completing an initial public offering:
1. Significant legal, accounting and marketing costs, many of which are ongoing
2. Requirement to disclose financial and business information
3. Meaningful time, effort and attention required of senior management
4. Risk that required funding will not be raised
5. Public dissemination of information which may be useful to competitors, suppliers and
customers.
Procedure
IPOs generally involve one or more investment banks known as "underwriters". The
company offering its shares, called the "issuer", enters into a contract with a lead underwriter to
sell its shares to the public. The underwriter then approaches investors with offers to sell those
shares.
The sale (allocation and pricing) of shares in an IPO may take several forms. Common
methods include:
1. Best efforts contract
2. Firm commitment contract
3. All-or-none contract
4. Bought deal
A large IPO is usually underwritten by a "syndicate" of investment banks, the largest of
which take the position of "lead underwriter". Upon selling the shares, the underwriters retain a
portion of the proceeds as their fee. This fee is called an underwriting spread. The spread is
calculated as a discount from the price of the shares sold (called the gross spread). Components
of an underwriting spread in an initial public offering (IPO) typically include the following (on a
per share basis): Manager's fee, Underwriting fee—earned by members of the syndicate, and the
Concession—earned by the broker-dealer selling the shares. The Manager would be entitled to
the entire underwriting spread. A member of the syndicate is entitled to the underwriting fee and
the concession. A broker dealer who is not a member of the syndicate but sells shares would
receive only the concession, while the member of the syndicate who provided the shares to that
broker dealer would retain the underwriting fee.[2] Usually, the managing/lead underwriter, also
known as the bookrunner, typically the underwriter selling the largest proportions of the IPO,
takes the highest portion of the gross spread, up to 8% in some cases.
Multinational IPOs may have many syndicates to deal with differing legal requirements
in both the issuer's domestic market and other regions. For example, an issuer based in the E.U.
may be represented by the main selling syndicate in its domestic market, Europe, in addition to
separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter
in the main selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements and because it is an expensive process,
IPOs typically involve one or more law firms with major practices in securities law, such as the
Magic Circle firms of London and the white shoe firms of New York City.
Public offerings are sold to both institutional investors and retail clients of the
underwriters. A licensed securities salesperson (Registered Representative in the USA and
Canada) selling shares of a public offering to his clients is paid a portion of the selling
concession (the fee paid by the issuer to the underwriter) rather than by his client. In some
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situations, when the IPO is not a "hot" issue (undersubscribed), and where the salesperson is the
client's advisor, it is possible that the financial incentives of the advisor and client may not be
aligned.
The issuer usually allows the underwriters an option to increase the size of the offering
by up to 15% under certain circumstance known as the greenshoe or overallotment option. This
option is always exercised when the offering is considered a "hot" issue, by virtue of being
oversubscribed.
In the US, clients are given a preliminary prospectus, also known as a red herring
prospectus during the initial quiet period. During this period, the shares cannot be offered for
sale. Brokers can, however, take "indications of interest" from their clients. At the time of the
stock launch, after the Registration Statement has become effective, indications of interest can be
converted to buy orders, at the discretion of the buyer. Sales can only be made through a final
prospectus cleared by the Securities and Exchange Commission.
Before legal actions initiated by New York Attorney General Eliot Spitzer, which later
became known as the Global Settlement enforcement agreement, some large investment firms
had initiated favorable research coverage of companies in an effort to aid Corporate Finance
departments and retail divisions engaged in the marketing of new issues. The central issue in that
enforcement agreement had been judged in court previously. It involved the conflict of interest
between the investment banking and analysis departments of ten of the largest investment firms
in the United States. The investment firms involved in the settlement had all engaged in actions
and practices that had allowed the inappropriate influence of their research analysts by their
investment bankers seeking lucrative fees.[3] A typical violation addressed by the settlement was
the case of CSFB and Salomon Smith Barney, which were alleged to have engaged in
inappropriate spinning of "hot" IPOs and issued fraudulent research reports in violation of
various sections within the Securities Exchange Act of 1934.
Pricing of IPO
A company planning an IPO typically appoints a lead manager, known as a bookrunner,
to help it arrive at an appropriate price at which the shares should be issued. There are two
primary ways in which the price of an IPO can be determined. Either the company, with the help
of its lead managers, fixes a price (fixed price method) or the price can be determined through
analysis of confidential investor demand data, compiled by the bookrunner. That process is
known as book building.
Historically, some IPOs both globally and in the United States have been underpriced.
The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it
first becomes publicly traded. Flipping, or quickly selling shares for a profit, can lead to
significant gains for investors who have been allocated shares of the IPO at the offering price.
However, underpricing an IPO results in lost potential capital for the issuer. One extreme
example is theglobe.com IPO which helped fuel the IPO "mania" of the late 90's internet era.
Underwritten by Bear Stearns on November 13, 1998, the IPO was priced at $9 per share. The
share price quickly increased 1000% after the opening of trading, to a high of $97. Selling
pressure from institutional flipping eventually drove the stock back down, and it closed the day
at $63. Although the company did raise about $30 million from the offering it is estimated that
with the level of demand for the offering and the volume of trading that took place the company
might have left upwards of $200 million on the table.
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The danger of overpricing is also an important consideration. If a stock is offered to the

public at a higher price than the market will pay, the underwriters may have trouble meeting their
commitments to sell shares. Even if they sell all of the issued shares, the stock may fall in value
on the first day of trading. If so, the stock may lose its marketability and hence even more of its
value. This could result in losses for investors, many of whom being the most favored clients of
the underwriters.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and
attempt to reach an offering price that is low enough to stimulate interest in the stock, but high
enough to raise an adequate amount of capital for the company. The process of determining an
optimal price usually involves the underwriters ("syndicate") arranging share purchase
commitments from leading institutional investors.
Some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that the underpricing of
IPOs is less a deliberate act on the part of issuers and/or underwriters, than the result of an over-
reaction on the part of investors (Friesen & Swift, 2009). One potential method for determining
under-pricing is through the use of IPO Underpricing Algorithms.
Types of IPO
There are many types of IPO, illustrating the different management and owner compensation
contracts in firms.
1. The plain vanilla IPO is undertaken by a privately held company, mostly owned by
management, who want to secure additional funding and determine the company’s fair
market value.
2. A venture capital-backed IPO refers to a company in which management has sold its
shares to one or more groups of private investors in return for funding and advice. This
provides an effective incentive scheme for venture capitalists to implement their exit
strategy after they have successfully transformed a firm in which they invested so that it
is financially viable in the market.
3. In a reverse-leveraged buyout, the proceeds of the IPO are used to pay off the debt
accumulated when a company was privatized after a previous listing on an exchange.
This process enables owners who own majority shares to privatize their publicly trading
firms, which are undervalued in the market, thus realizing financial gains after the public
was informed of the high intrinsic value of the private firm.
4. A spin-off IPO denotes the process whereby a large company carves out a stand-alone
subsidiary and sells it to the public. A spin-off may also offer owners of the parent firm
and hedge funds the opportunity to capitalize mispricing in both the subsidiary and parent
if the market is not efficient enough. An interesting example in the United States was the
spin-off of uBid by Creative Computers in 1998, which enabled arbitragers to capitalize
the mispricing between the two listed companies.
Market Definition
In marketing, the term market refers to the group of consumers or organizations that is interested
in the product, has the resources to purchase the product, and is permitted by law and other
regulations to acquire the product. The market definition begins with the total population and
progressively narrows as shown in the following diagram.
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Market Definition
Conceptual Diagram
Beginning with the total population, various terms are used to describe the market based
on the level of narrowing:
1. Total population
2. Potential market - those in the total population who have interest in acquiring the product.
3. Available market - those in the potential market who have enough money to buy the
product.
4. Qualified available market - those in the available market who legally are permitted to
buy the product.
5. Target market - the segment of the qualified available market that the firm has decided to
serve (the served market).
6. Penetrated market - those in the target market who have purchased the product.
In the above listing, "product" refers to both physical products and services.
The size of the market is not necessarily fixed. For example, the size of the available
market for a product can be increased by decreasing the product's price, and the size of the
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qualified available market can be increased through changes in legislation that result in fewer
restrictions on who can buy the product.
Defining the market is the first step in analyzing it. Since the market is likely to be
composed of consumers whose needs differ, market segmentation is useful in order to better
understand those needs and to select the groups within the market that the firm will serve.
Marketing
Marketing is "the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, partners, and society
at large."
For business to consumer marketing it is "the process by which companies create value for
customers and build strong customer relationships, in order to capture value from customers in
return". For business to business marketing it is creating value, solutions, and relationships either
short term or long term with a company or brand. It generates the strategy that underlies sales
techniques, business communication, and business developments. It is an integrated process
through which companies build strong customer relationships and create value for their
customers and for themselves.
Marketing is used to identify the customer, satisfy the customer, and keep the customer.
With the customer as the focus of its activities, marketing management is one of the major
components of business management.
Marketing evolved to meet the stasis in developing new markets caused by mature
markets and overcapacities in the last 2-3 centuries.[citation needed] The adoption of marketing
strategies requires businesses to shift their focus from production to the perceived needs and
wants of their customers as the means of staying profitable.
[citation needed]
The term marketing concept holds that achieving organizational goals depends on
knowing the needs and wants of target markets and delivering the desired satisfactions. It
proposes that in order to satisfy its organizational objectives, an organization should anticipate
the needs and wants of consumers and satisfy these more effectively than competitors.
The term developed from an original meaning which referred literally to going to a market to
buy or sell goods or services. Seen from a systems point of view, sales process engineering
marketing is "a set of processes that are interconnected and interdependent with other
functions,[4] whose methods can be improved using a variety of relatively new approaches."
Selling
Selling is offering to exchange something of value for something else. The something of
value being offered may be tangible or intangible. The something else, usually money, is most
often seen by the seller as being of equal or greater value than that being offered for sale.
Another person or organization expressing an interest in acquiring the offered thing of
value is referred to as a potential buyer, prospective customer or prospect. Buying and selling are
understood to be two sides of the same "coin" or transaction. Both seller and buyer engage is in a
process of negotiation to consummate the exchange of values. The exchange, or selling, process
has implied rules and identifiable stages. It is implied that the selling process will proceed fairly
and ethically so that the parties end up nearly equally rewarded. The stages of selling, and
buying, involve getting acquainted, assessing each party’s need for the other’s item of value, and
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determining if the values to be exchanged are equivalent or nearly so, or, in buyer's terms, "worth
the price.”
From a management viewpoint it is thought of as a part of marketing,[1] although the
skills required are different. Sales often forms a separate grouping in a corporate structure,
employing separate specialist operatives known as salespersons (singular: salesperson). Selling is
considered by many to be a sort of persuading "art". Contrary to popular belief, the
methodological approach of selling refers to a systematic process of repetitive and measurable
milestones, by which a salesman relates his or her offering of a product or service in return
enabling the buyer to achieve their goal in an economic way. While the sales process refers to a
systematic process of repetitive and measurable milestones, the definition of the selling is
somewhat ambiguous due to the close nature of advertising, promotion, public relations, and
direct marketing.
Difference Between Selling And Marketing

In general we use ‘marketing’ and ‘selling’ as synonyms but there is a substantial
difference between both the concepts. It is necessary to understand the differences between them
for a successful marketing manager. Selling has a product focus and mostly producer driven. It is
the action part of marketing only and has short – term goal of achieving market share. The
emphasis is on price variation for closing the sale where the objective can be stated, as “I must
somehow sell the product”. This short – term focus does not consider a prudential planning for
building up the brand in the market place and winning competitive advantage through a high
loyal set of customers. The end means of any sales activity is maximizing profits through sales
maximization.
When the focus is on selling, the businessman thinks that after production has been
completed the task of the sales force starts. It is also the task of the sales department to sell
whatever the production department has manufactured. Aggressive sales methods are justified to
meet this goal and customer’s actual needs and satisfaction are taken for granted. Selling
converts the product in to cash for the company in the short run.
Marketing as a concept and approach is much wider than selling and is also dynamic as
the focus is on the customer rather than the product. While selling revolves around the needs and
interest of the manufacturer or marketer, marketing revolves around that of consumer. It is the
whole process of meeting and satisfying the needs of the consumer.
Marketing consists of all those activities that are associated with product planning,
pricing, promoting and distributing the product or service. The task commences with identifying
consumer needs and does not end till feedback on consumer sat-isfaction from the consumption
of the product is received. It is a long chain of activity, which comprises production, packing,
promotion, pricing, distribution and then the selling. Consumer needs become the guiding force
behind all these activities. Profits are not ignored but they are built up on a long run basis. Mind
share is more important than market share in Marketing.
According to Prof. Theodore Levitt ‘The difference between selling and marketing is
more than semantic. A truly marketing minded firm tries to create value satisfying goods and
services which the consumers will want to buy. What is offers for sale is determined not by the
seller but by the buyers. The seller takes his cues from the buyer and the product becomes the
consequence of the marketing effort, not vice versa. Selling merely concerns itself with the tricks
and techniques of getting the customers to exchange their cash for the company’s products, it
does not bother about the value satisfaction that the exchange is all about. On the contrary,
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marketing views the entire business as consisting of a tightly integrated effort to discover, create,
arouse ad satisfy customer needs’.
Selling
1. Emphasis is on the product
2. Company Manufactures the product first
3. Management is sales volume oriented
4. Planning is short-run-oriented in terms of today’s products and markets
5. Stresses needs of seller
6. Views business as a good producing process
7. Emphasis on staying with existing technology and reducing costs
8. Different departments work as in a highly separate water tight compartments
9. Cost determines Price
10. Selling views customer as a last link in business
Marketing
1. Emphasis on consumer needs wants

2. Company first determines customers needs and wants and then decides out how to deliver
a product to satisfy these wants
3. Management is profit oriented
4. Planning is long-run-oriented in today’s products and terms of new products, tomorrow’s
markets and future growth
5. Stresses needs and wants of buyers
6. Views business as consumer producing process satisfying process
7. Emphasis on innovation on every existing technology and reducing every sphere, on
providing better costs value to the customer by adopting a superior technology
8. All departments of the business integrated manner, the sole purpose being generation of
consumer satisfaction
9. Consumer determine price, price determines cost
10. Marketing views the customer last link in business as the very purpose of the business
Advertising
Advertising or advertizing is a form of communication used to encourage or persuade an
audience (viewers, readers or listeners; sometimes a specific group of people) to continue or take
some new action. Most commonly, the desired result is to drive consumer behavior with respect
to a commercial offering, although political and ideological advertising is also common. The
purpose of advertising may also be to reassure employees or shareholders that a company is
viable or successful. Advertising messages are usually paid for by sponsors and viewed via
various traditional media; including mass media such as newspaper, magazines, television
commercial, radio advertisement, outdoor advertising or direct mail; or new media such as blogs,
websites or text messages.
Commercial advertisers often seek to generate increased consumption of their products or
services through "branding," which involves the repetition of an image or product name in an
effort to associate certain qualities with the brand in the minds of consumers. Non-commercial
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advertisers who spend money to advertise items other than a consumer product or service include
political parties, interest groups, religious organizations and governmental agencies. Nonprofit
organizations may rely on free modes of persuasion, such as a public service announcement
(PSA).
Modern advertising developed with the rise of mass production in the late 19th and early
20th centuries.
Advertising theory
Hierarchy of effects model

It clarifies the objectives of an advertising campaign and for each individual
advertisement. The model suggests that there are six steps a consumer or a business
buyer moves through when making a purchase. The steps are:
1. Awareness
2. Knowledge
3. Liking
4. Preference
5. Conviction
6. Purchase
Means-End Theory
This approach suggests that an advertisement should contain a message or means
that leads the consumer to a desired end state.
Leverage Points
It is designed to move the consumer from understanding a product's benefits to
linking those benefits with personal values.
Verbal and Visual Images

The political economy of advertisement is the theory that a few powerful groups,
or ‘knowledge monopolies,’ control the thoughts, behaviors, and actions of the
public through mass media as communication. As a form of communication,
advertisement uses repeated verbal and visual images to develop and alter society.
Over time, these repeated images and symbols become associated with either
positive or negative attributes and can modify the public’s evaluation of such
cultural objects as people, religions, ethnic groups, and societal roles. Thus, the
media forms the beliefs and values of the public through media portrayals. The
messages of the ((political economy)) commonly correlate with current economic
interests.
Types of Advertising
Virtually any medium can be used for advertising. Commercial advertising media can
include wall paintings, billboards, street furniture components, printed flyers and rack cards,
radio, cinema and television adverts, web banners, mobile telephone screens, shopping carts,
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web popups, skywriting, bus stop benches, human billboards, magazines, newspapers, town
criers, sides of buses, banners attached to or sides of airplanes ("logojets"), in-flight
advertisements on seatback tray tables or overhead storage bins, taxicab doors, roof mounts and
passenger screens, musical stage shows, subway platforms and trains, elastic bands on disposable
diapers,doors of bathroom stalls,stickers on apples in supermarkets, shopping cart handles
(grabertising), the opening section of streaming audio and video, posters, and the backs of event
tickets and supermarket receipts. Any place an "identified" sponsor pays to deliver their message
through a medium is advertising.
Television advertising / Music in advertising

The TV commercial is generally considered the most effective mass-market advertising
format, as is reflected by the high prices TV networks charge for commercial airtime
during popular TV events. The annual Super Bowl football game in the United States is
known as the most prominent advertising event on television. The average cost of a
single thirty-second TV spot during this game has reached US$3.5 million (as of 2012).
The majority of television commercials feature a song or jingle that listeners soon relate
to the product. Virtual advertisements may be inserted into regular television
programming through computer graphics. It is typically inserted into otherwise blank
backdrops[14] or used to replace local billboards that are not relevant to the remote
broadcast audience.[15] More controversially, virtual billboards may be inserted into the
background[16] where none exist in real-life. This technique is especially used in
televised sporting events.[17][18] Virtual product placement is also possible.[19][20]
Infomercials
An infomercial is a long-format television commercial, typically five minutes or longer.
The word "infomercial" is a portmanteau of the words "information" & "commercial".
The main objective in an infomercial is to create an impulse purchase, so that the
consumer sees the presentation and then immediately buys the product through the
advertised toll-free telephone number or website. Infomercials describe, display, and
often demonstrate products and their features, and commonly have testimonials from
consumers and industry professionals.
Radio Advertising
Radio advertising is a form of advertising via the medium of radio. Radio advertisements
are broadcast as radio waves to the air from a transmitter to an antenna and a thus to a
receiving device. Airtime is purchased from a station or network in exchange for airing
the commercials. While radio has the limitation of being restricted to sound, proponents
of radio advertising often cite this as an advantage. Radio is an expanding medium that
can be found not only on air, but also online. According to Arbitron, radio has
approximately 241.6 million weekly listeners, or more than 93 percent of the U.S.
population.
Online Advertising
Online advertising is a form of promotion that uses the Internet and World Wide Web for
the expressed purpose of delivering marketing messages to attract customers. Online ads
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are delivered by an ad server. Examples of online advertising include contextual ads that
appear on search engine results pages, banner ads, in text ads, Rich Media Ads, Social
network advertising, online classified advertising, advertising networks and e-mail
marketing, including e-mail spam.
Product Placements
Covert advertising, also known as guerrilla advertising, is when a product or brand is
embedded in entertainment and media. For example, in a film, the main character can use
an item or other of a definite brand, as in the movie Minority Report, where Tom Cruise's
character John Anderton owns a phone with the Nokia logo clearly written in the top
corner, or his watch engraved with the Bulgari logo. Another example of advertising in
film is in I, Robot, where main character played by Will Smith mentions his Converse
shoes several times, calling them "classics," because the film is set far in the future. I,
Robot and Spaceballs also showcase futuristic cars with the Audi and Mercedes-Benz
logos clearly displayed on the front of the vehicles. Cadillac chose to advertise in the
movie The Matrix Reloaded, which as a result contained many scenes in which Cadillac
cars were used. Similarly, product placement for Omega Watches, Ford, VAIO, BMW
and Aston Martin cars are featured in recent James Bond films, most notably Casino
Royale. In "Fantastic Four: Rise of the Silver Surfer", the main transport vehicle shows a
large Dodge logo on the front. Blade Runner includes some of the most obvious product
placement; the whole film stops to show a Coca-Cola billboard.
Press Advertising
Press advertising describes advertising in a printed medium such as a newspaper,
magazine, or trade journal. This encompasses everything from media with a very broad
readership base, such as a major national newspaper or magazine, to more narrowly
targeted media such as local newspapers and trade journals on very specialized topics. A
form of press advertising is classified advertising, which allows private individuals or
companies to purchase a small, narrowly targeted ad for a low fee advertising a product
or service. Another form of press advertising is the Display Ad, which is a larger ad (can
include art) that typically run in an article section of a newspaper.
Billboard Advertising
Billboards are large structures located in public places which display advertisements to
passing pedestrians and motorists. Most often, they are located on main roads with a large
amount of passing motor and pedestrian traffic; however, they can be placed in any
location with large amounts of viewers, such as on mass transit vehicles and in stations,
in shopping malls or office buildings, and in stadiums.
Mobile Billboard Advertising

Mobile billboards are generally vehicle mounted billboards or digital screens. These can
be on dedicated vehicles built solely for carrying advertisements along routes preselected
by clients, they can also be specially equipped cargo trucks or, in some cases, large
banners strewn from planes. The billboards are often lighted; some being backlit, and
others employing spotlights. Some billboard displays are static, while others change; for
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example, continuously or periodically rotating among a set of advertisements. Mobile

displays are used for various situations in metropolitan areas throughout the world,
including: Target advertising, One-day, and long-term campaigns, Conventions, Sporting
events, Store openings and similar promotional events, and Big advertisements from
smaller companies.
In-Store Advertising
In-store advertising is any advertisement placed in a retail store. It includes placement of
a product in visible locations in a store, such as at eye level, at the ends of aisles and near
checkout counters (aka POP—Point Of Purchase display), eye-catching displays
promoting a specific product, and advertisements in such places as shopping carts and in-
store video displays.
Coffee Cup Advertising

Coffee cup advertising is any advertisement placed upon a coffee cup that is distributed
out of an office, café, or drive-through coffee shop. This form of advertising was first
popularized in Australia, and has begun growing in popularity in the United States, India,
and parts of the Middle East.
Street Advertising
This type of advertising first came to prominence in the UK by Street Advertising
Services to create outdoor advertising on street furniture and pavements. Working with
products such as Reverse Graffiti, air dancer's and 3D pavement advertising, the media
became an affordable and effective tool for getting brand messages out into public
spaces.
Sheltered Outdoor Advertising

This type of advertising opens the possibility of combining outdoor with indoor
advertisement by placing large mobile, structures (tents) in public places on temporary
bases. The large outer advertising space exerts a strong pull on the observer, the product
is promoted indoor, where the creative decor can intensify the impression.
Celebrity Branding
This type of advertising focuses upon using celebrity power, fame, money, popularity to
gain recognition for their products and promote specific stores or products. Advertisers
often advertise their products, for example, when celebrities share their favorite products
or wear clothes by specific brands or designers. Celebrities are often involved in
advertising campaigns such as television or print adverts to advertise specific or general
products. The use of celebrities to endorse a brand can have its downsides, however. One
mistake by a celebrity can be detrimental to the public relations of a brand. For example,
following his performance of eight gold medals at the 2008 Olympic Games in Beijing,
China, swimmer Michael Phelps' contract with Kellogg's was terminated, as Kellogg's
did not want to associate with him after he was photographed smoking marijuana.
Celebrities such as Britney Spears have advertised for multiple products including Pepsi,
Candies from Kohl's, Twister, NASCAR, Toyota and many more.
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The Business Plan

A business plan is a formal statement of a set of business goals, the reasons why they are
believed attainable, and the plan for reaching those goals. It may also contain background
information about the organization or team attempting to reach those goals.
The most standard business plan is a start-up plan, which defines the steps for a new
business. It covers standard topics including the company, product or service, market, forecasts,
strategy, implementation milestones, management team, and financial analysis. The financial
analysis includes projected sales, profit and loss, balance sheet, cash flow, and probably a few
other tables. The plan starts with an executive summary and ends with appendices showing
monthly projections for the first year.
Business plans may also target changes in perception and branding by the customer,
client, taxpayer, or larger community. When the existing business is to assume a major change or
when planning a new venture, a 3 to 5 year business plan is required, since investors will look for
their annual return in that timeframe.
Audience
Business plans may be internally or externally focused. Externally focused plans target
goals that are important to external stakeholders, particularly financial stakeholders. They
typically have detailed information about the organization or team attempting to reach the goals.
With for-profit entities, external stakeholders include investors and customers. External stake-
holders of non-profits include donors and the clients of the non-profit's services. For government
agencies, external stakeholders include tax-payers, higher-level government agencies, and
international lending bodies such as the International Monetary Fund, the World Bank, various
economic agencies of the United Nations, and development banks.
Internally focused business plans target intermediate goals required to reach the external
goals. They may cover the development of a new product, a new service, a new IT system, a
restructuring of finance, the refurbishing of a factory or a restructuring of the organization. An
internal business plan is often developed in conjunction with a balanced scorecard or a list of
critical success factors. This allows success of the plan to be measured using non-financial
measures. Business plans that identify and target internal goals, but provide only general
guidance on how they will be met are called strategic plans.
Operational plans describe the goals of an internal organization, working group or
department. Project plans, sometimes known as project frameworks, describe the goals of a
particular project. They may also address the project's place within the organization's larger
strategic goals.
Content
Business plans are decision-making tools. There is no fixed content for a business plan.
Rather the content and format of the business plan is determined by the goals and audience. A
business plan represents all aspects of business planning process declaring vision and strategy
alongside sub-plans to cover marketing, finance, operations, human resources as well as a legal
plan, when required. A business plan is a summary of those disciplinary plans.
For example, a business plan for a non-profit might discuss the fit between the business
plan and the organization’s mission. Banks are quite concerned about defaults, so a business plan
for a bank loan will build a convincing case for the organization’s ability to repay the loan.
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Venture capitalists are primarily concerned about initial investment, feasibility, and exit
valuation. A business plan for a project requiring equity financing will need to explain why
current resources, upcoming growth opportunities, and sustainable competitive advantage will
lead to a high exit valuation.
Preparing a business plan draws on a wide range of knowledge from many different
business disciplines: finance, human resource management, intellectual property management,
supply chain management, operations management, and marketing, among others.[6] It can be
helpful to view the business plan as a collection of sub-plans, one for each of the main business
disciplines.
"... a good business plan can help to make a good business credible, understandable, and
attractive to someone who is unfamiliar with the business. Writing a good business plan can’t
guarantee success, but it can go a long way toward reducing the odds of failure."
Presentation formats
The format of a business plan depends on its presentation context. It is not uncommon for
businesses, especially start-ups to have three or four formats for the same business plan:
1. an "elevator pitch" - a three minute summary of the business plan's executive summary.
This is often used as a teaser to awaken the interest of potential funders, customers, or
strategic partners.
2. an oral presentation - a hopefully entertaining slide show and oral narrative that is meant
to trigger discussion and interest potential investors in reading the written presentation.
The content of the presentation is usually limited to the executive summary and a few key
graphs showing financial trends and key decision making benchmarks. If a new product
is being proposed and time permits, a demonstration of the product may also be included.
3. a written presentation for external stakeholders - a detailed, well written, and pleasingly
formatted plan targeted at external stakeholders.
4. an internal operational plan - a detailed plan describing planning details that are needed
by management but may not be of interest to external stakeholders. Such plans have a
somewhat higher degree of candor and informality than the version targeted at external
stakeholders and others.
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Typical Business Plan Outline

Typical structure for a business plan for a start up venture
1. cover page and table of contents
2. executive summary
3. business description
4. business environment analysis
5. industry background
6. competitor analysis
7. market analysis
8. marketing plan
9. operations plan
10. management summary
11. financial plan
12. attachments and milestones
Expanded Business Plan Outline

Here’s an expanded full business plan outline, with details you might want to include in your
own business plan.
1.0 Executive Summary

1.1 Objectives
1.2 Mission
1.3 Keys to Success
2.0 Company Summary

2.1 Company Ownership
2.2 Company History (for ongoing companies) or Start-up Plan (for new companies)
2.3 Company Locations and Facilities
3.0 Products and Services

3.1 Product and Service Description
3.2 Competitive Comparison
3.3 Sales Literature
3.4 Sourcing and Fulfillment
3.5 Technology
3.6 Future Products and Services
4.0 Market Analysis Summary

4.1 Market Segmentation
4.2 Target Market Segment Strategy
4.2.1 Market Needs
4.2.2 Market Trends
4.2.3 Market Growth
4.3 Industry Analysis
4.3.1 Industry Participants
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4.3.2 Distribution Patterns

4.3.3 Competition and Buying Patterns
4.3.4 Main Competitor
5.0 Strategy and Implementation Summary

5.1 Strategy Pyramids
5.2 Value Proposition
5.3 Competitive Edge
5.4 Marketing Strategy
5.4.1 Positioning Statements
5.4.2 Pricing Strategy
5.4.3 Promotion Strategy
5.4.4 Distribution Patterns
5.4.5 Marketing Programs
5.5 Sales Strategy
5.5.1 Sales Forecast
5.5.2 Sales Programs
5.6 Strategic Alliances
5.7 Milestones
6.0 Web Plan

6.1 Website Marketing Strategy
6.2 Development Requirements
7.0 Management Summary

7.1 Organizational Structure
7.2 Management Team
7.3 Management Team Gaps
7.4 Personnel Plan
8.0 Financial Plan

8.1 Important Assumptions
8.2 Key Financial Indicators
8.3 Break-even Analysis
8.4 Projected Profit and Loss
8.5 Projected Cash Flow
8.6 Projected Balance Sheet
8.7 Business Ratios
8.8 Long-term Plan
Outline of a Business Plan

Sample Business Plan Outline
Title Page
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Name of company, date, contact information, etc.

Table of Contents
Executive Summary
1. Business Concept
2. Company
3. Market Potential
4. Management Team
5. Distinct Competencies
6. Required Funding and its Use
7. Exit Strategy
Main Sections
I. Company Description
1. Mission Statement
2. Summary of Activity to Date
3. Current Stage of Development
4. Competencies
5. Product or Service
i. Description
ii. Benefits to customer
iii. Differences from current offerings
6. Objectives
7. Keys to Success
8. Location and Facilities
II. Industry Analysis
1. Entry Barriers
2. Supply and Distribution
3. Technological Factors
4. Seasonality
5. Economic Influences
6. Regulatory Issues
III. Market Analysis
1. Definition of Overall Market
2. Market Size and Growth
3. Market Trends
4. Market Segments
5. Targeted Segments
6. Customer Characteristics
7. Customer Needs
8. Purchasing Decision Process
9. Product Positioning
IV. Competition
1. Profiles of Primary Competitors
2. Competitors' Products/Services & Market Share
3. Competitive Evaluation of Product
a. Distinct Competitive Advantage
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b. Competitive Weaknesses
4. Future Competitors
V. Marketing and Sales

1. Products Offered
2. Pricing
3. Distribution
4. Promotion
a. Advertising and Publicity
b. Trade Shows
c. Partnerships
d. Discounts and Incentives
5. Sales Force
6. Sales Forecasts
VI. Operations
1. Product Development
a. Development Team
b. Development Costs
c. Development Risks
2. Manufacturing (if applicable)
a. Production Processes
b. Production Equipment
c. Quality Assurance
d. Administration
3. Key Suppliers
4. Product / Service Delivery
5. Customer Service and Support
6. Human Resource Plan
7. Facilities
VII. Management and Organization

1. Management Team
2. Open Positions
3. Board of Directors
4. Key Personnel
5. Organizational Chart
VIII. Capitalization and Structure

1. Legal Structure of Company
2. Present Equity Positions
3. Deal Structure
4. Exit Strategy
IX. Development and Milestones
Time may be specified on a relative scale rather than specific calendar dates. Milestones may
include some or all of the following:
1. Financing Commitments
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2. Product Development Milestones

a. Prototype
b. Testing
c. Launch
3. Signing of Significant Contracts
4. Achievment of Break-even Performance
5. Expansion
6. Additional Funding
7. Any other significant milestones
X. Risks and Contingencies

Some common risks include:
1. Increased competition
2. Loss of a key employee
3. Suppliers' failure to meet deadlines
4. Regulatory changes
5. Change in business conditions
XI. Financial Projections

1. Assumptions (Start date, commissions, tax rates, average inventory, sales forecasts, etc.)
2. Financial Statements (Balance Sheet, Income Statement, Cash Flow Statement)
3. Break Even Analysis
4. Key Ratio Projections (quick ratio, current ratio, D/E, D/A, ROE, ROA, working capital)
5. Financial Resources
6. Financial Strategy
XII. Summary and Conclusions
Appendices
May include:
1. Management Resumes
2. Competitive Analysis
3. Sales Projections
4. Any other supporting documents
Marketing
Marketing is "the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, partners, and society
at large."[1]
For business to consumer marketing it is "the process by which companies create value
for customers and build strong customer relationships, in order to capture value from customers
in return". For business to business marketing it is creating value, solutions, and relationships
either short term or long term with a company or brand. It generates the strategy that underlies
sales techniques, business communication, and business developments.[2] It is an integrated
process through which companies build strong customer relationships and create value for their
customers and for themselves.[2]
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Marketing is used to identify the customer, satisfy the customer, and keep the customer.
With the customer as the focus of its activities, marketing management is one of the major
components of business management.
Marketing evolved to meet the stasis in developing new markets caused by mature
markets and overcapacities in the last 2-3 centuries.[citation needed] The adoption of marketing
strategies requires businesses to shift their focus from production to the perceived needs and
wants of their customers as the means of staying profitable.
The term marketing concept holds that achieving organizational goals depends on
knowing the needs and wants of target markets and delivering the desired satisfactions.[3] It
proposes that in order to satisfy its organizational objectives, an organization should anticipate
the needs and wants of consumers and satisfy these more effectively than competitors.[3]
The term developed from an original meaning which referred literally to going to a market to buy
or sell goods or services. Seen from a systems point of view, sales process engineering marketing
is "a set of processes that are interconnected and interdependent with other functions,[4] whose
methods can be improved using a variety of relatively new approaches."
The Marketing Concept

The marketing concept proposes that the success of the firm depends on the marketing
efforts of the company and in delivering a better value proposition as compared to its
competitors in its own target market.
Lets take an example of 2 eternal rivals – Pepsi and Coke – Both of these companies have
similar products. However the value proposition presented by both is different. These companies
thrive on the marketing concept. Where Pepsi focuses on youngsters, Coke delivers on a holistic
approach. Also the value proposition by Coke has been better over ages as compared to Pepsi
which shows that coke especially thrives on the marketing concept, i.e it delivers a better value
proposition as compared to its competitor.
The marketing concept also demands that the strategic decisions made by the company
are taken keeping the customer in mind. Especially the needs wants and demands of the
customers. A holistic approach is taken with the whole orgnization striving to make the customer
experience better. Applying the marketing concept also means knowing what the market needs
and expects from the company as a result of which companies which apply the marketing
concept need to carry out more of market research.
The marketing concept is the most followed ideology by top companies. This is because,
with the rise of economy, consumers have become more knowledgeable and choosy as a result of
which the organization cannot concentrate on what it sells but rather it has to concentrate on
what the customer wants to buy.
As we are ultimately satisfying the customer, the marketing concept also demands that
the organization integrate all its different departments to give value to the customer. This means
that all the departments including Marketing, Finance, HR or Operations should have an idea of
the core objectives of the company as well as the goal of the company.
The market concept thus relies on three key aspects
1. What is the target market – The first step is to determine exactly which is the target market.
This can be by market research and deciding which target market will give the best returns.
2. What are the needs wants and demands of the target market – A further step in marketing
research is the consumer preferences study. This study will help the firm determine the needs
wants and demands of the target market thereby helping the firm in deciding their strategies.
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3. How best can we deliver a value proposition – In this step, the firm decided what strategy it
needs to adopt. What combination of ATL and BTL activities should be adopted. What kind
of value should the firm create and deliver. How should it integrate its different departments.
Ultimately, the firm decides how to apply the marketing concept within itself to deliver a
better customer experience.
To summarise, The marketing concept relies on market research and determining needs
of the customer such that a better marketing strategy can be devised which satisfies the needs of
the customer. The marketing concept also demands a holistic approach from the organization.
The Societal Marketing Concept

The Societal Marketing Concept was an offshoot of the marketing concept wherein an
organization believes in giving back to the society by producing better products targeted towards
society welfare. Some have questioned whether the marketing concept is an appropriate
philosophy in an age of environmental deterioration, resource shortages, explosive population
growth, world hunger and poverty, and neglected social services. Are companies that
successfully satisfy consumer wants necessarily acting in the best, long-run interests of
consumers and society?
The marketing concept sidesteps the potential conflicts among consumer wants,
consumer interests, and long-run societal welfare. Yet some firms and industries are criticized
for satisfying consumer wants at society’s expense. Such situations call for a new term that
enlarges the marketing concept. We propose calling it the societal marketing concept, which
holds that the organization’s task is to determine the needs, wants, and interests of target markets
and to deliver the desired satisfactions more effectively and efficiently than competitors in a way
that preserves or enhances the consumer’s and the society’s well-being.
The societal marketing concept calls upon marketers to build social and ethical
considerations into their marketing practices. They must balance and juggle the often conflicting
criteria of company profits, consumer want satisfaction, and public interest. Yet a number of
companies have achieved notable sales and profit gains by adopting and practicing the societal
marketing concept. Some companies practice a form of the societal marketing concept called
cause related marketing. Pringle and Thompson define this as “activity by which a company with
an image, product, or service to market builds a relationship or partnership with a ‘cause,’ or a
number of ‘causes,’ for mutual benefit.
They see it as affording an opportunity for companies to enhance their corporate
reputation, raise brand awareness, increase customer loyalty, build sales, and increase press
coverage. They believe that customers will increasingly look for demonstrations of good
corporate citizenship. Smart companies will respond by adding “higher order” image attributes
than simply rational and emotional benefits. Critics, however, complain that cause related
marketing might make consumers feel they have fulfilled their philanthropic duties by buying
products instead of donating to causes directly. Thus societal marketing concept as related to
cause related marketing differs mainly because here, the company makes a proactive effort to
give back to the society.
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Market Analysis
A market analysis studies the attractiveness and the dynamics of a special market within a
special industry. It is part of the industry analysis and this in turn of the global environmental
analysis. Through all these analyses the opportunities, strengths, weaknesses and threats of a
company can be identified. Finally, with the help of a SWOT analysis, adequate business
strategies of a company will be defined.[1] The market analysis is also known as a documented
investigation of a market that is used to inform a firm's planning activities, particularly around
decisions of inventory, purchase, work force expansion/contraction, facility expansion, purchases
of capital equipment, promotional activities, and many other aspects of a company.
David A. Aaker outlined the following dimensions of a market analysis:
http://www.netmba.com/marketing/market/analysis/
1. Market size (current and future)
2. Market growth rate
3. Market profitability
4. Industry cost structure
5. Distribution channels
6. Market trends
7. Key success factors
The goal of a market analysis is to determine the attractiveness of a market, both now and
in the future. Organizations evaluate the future attractiveness of a market by gaining an
understanding of evolving opportunities and threats as they relate to that organization's own
strengths and weaknesses.
Organizations use the finding to guide the investment decisions they make to advance
their success. The findings of a market analysis may motivate an organization to change various
aspects of its investment strategy. Affected areas may include inventory levels,a work force
expansion/contraction, facility expansion, purchases of capital equipment, and promotional
activities
Market Size
The size of the market can be evaluated based on present sales and on potential sales if the use of
the product were expanded. The following are some information sources for determining market
size:
1. government data
2. trade associations
3. financial data from major players
4. customer surveys
Market Growth Rate

A simple means of forecasting the market growth rate is to extrapolate historical data into
the future. While this method may provide a first-order estimate, it does not predict important
turning points. A better method is to study growth drivers such as demographic information and
sales growth in complementary products. Such drivers serve as leading indicators that are more
accurate than simply extrapolating historical data.
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Important inflection points in the market growth rate sometimes can be predicted by
constructing a product diffusion curve. The shape of the curve can be estimated by studying the
characteristics of the adoption rate of a similar product in the past.
Ultimately, the maturity and decline stages of the product life cycle will be reached.
Some leading indicators of the decline phase include price pressure caused by competition, a
decrease in brand loyalty, the emergence of substitute products, market saturation, and the lack
of growth drivers.
Market Profitability
While different firms in a market will have different levels of profitability, the average profit
potential for a market can be used as a guideline for knowing how difficult it is to make money
in the market. Michael Porter devised a useful framework for evaluating the attractiveness of an
industry or market. This framework, known as Porter's five forces, identifies five factors that
influence the market profitability:
1. Buyer power
2. Supplier power
3. Barriers to entry
4. Threat of substitute products
5. Rivalry among firms in the industry
Industry Cost Structure

The cost structure is important for identifying key factors for success. To this end,
Porter's value chain model is useful for determining where value is added and for isolating the
costs.
The cost structure also is helpful for formulating strategies to develop a competitive
advantage. For example, in some environments the experience curve effect can be used to
develop a cost advantage over competitors.
Distribution Channels
The following aspects of the distribution system are useful in a market analysis:
1. Existing distribution channels - can be described by how direct they are to the customer.
2. Trends and emerging channels - new channels can offer the opportunity to develop a
competitive advantage.
3. Channel power structure - for example, in the case of a product having little brand equity,
retailers have negotiating power over manufacturers and can capture more margin.
Market Trends
Changes in the market are important because they often are the source of new opportunities and
threats. The relevant trends are industry-dependent, but some examples include changes in price
sensitivity, demand for variety, and level of emphasis on service and support. Regional trends
also may be relevant.
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Key Success Factors

The key success factors are those elements that are necessary in order for the firm to achieve its
marketing objectives. A few examples of such factors include:
1. Access to essential unique resources
2. Ability to achieve economies of scale
3. Access to distribution channels
4. Technological progress
It is important to consider that key success factors may change over time, especially as the
product progresses through its life cycle.
The Marketing Process

Under the marketing concept, the firm must find a way to discover unfulfilled customer
needs and bring to market products that satisfy those needs. The process of doing so can be
modeled in a sequence of steps: the situation is analyzed to identify opportunities, the strategy is
formulated for a value proposition, tactical decisions are made, the plan is implemented and the
results are monitored.
The Marketing Process
Situation Analysis
|
V
Marketing Strategy
|
V
Marketing Mix Decisions
|
V
Implementation & Control
I. Situation Analysis
A thorough analysis of the situation in which the firm finds itself serves as the basis for
identifying opportunities to satisfy unfulfilled customer needs. In addition to identifying the
customer needs, the firm must understand its own capabilities and the environment in which it is
operating.
The situation analysis thus can be viewed in terms an analysis of the external
environment and an internal analysis of the firm itself. The external environment can be
described in terms of macro-environmental factors that broadly affect many firms, and micro-
environmental factors closely related to the specific situation of the firm.
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The situation analysis should include past, present, and future aspects. It should include a
history outlining how the situation evolved to its present state, and an analysis of trends in order
to forecast where it is going. Good forecasting can reduce the chance of spending a year bringing
a product to market only to find that the need no longer exists.
If the situation analysis reveals gaps between what consumers want and what currently is
offered to them, then there may be opportunities to introduce products to better satisfy those
consumers. Hence, the situation analysis should yield a summary of problems and opportunities.
From this summary, the firm can match its own capabilities with the opportunities in order to
satisfy customer needs better than the competition.
There are several frameworks that can be used to add structure to the situation analysis:
1. 5 C Analysis - company, customers, competitors, collaborators, climate. Company
represents the internal situation; the other four cover aspects of the external situation
2. PEST analysis - for macro-environmental political, economic, societal, and technological
factors. A PEST analysis can be used as the "climate" portion of the 5 C framework.
3. SWOT analysis - strengths, weaknesses, opportunities, and threats - for the internal and
external situation. A SWOT analysis can be used to condense the situation analysis into a
listing of the most relevant problems and opportunities and to assess how well the firm is
equipped to deal with them.
II. Marketing Strategy

Once the best opportunity to satisfy unfulfilled customer needs is identified, a strategic
plan for pursuing the opportunity can be developed. Market research will provide specific market
information that will permit the firm to select the target market segment and optimally position
the offering within that segment. The result is a value proposition to the target market. The
marketing strategy then involves:
1. Segmentation
2. Targeting (target market selection)
3. Positioning the product within the target market
4. Value proposition to the target market
III. Marketing Mix Decisions

Detailed tactical decisions then are made for the controllable parameters of the marketing
mix. The action items include:
1. Product development - specifying, designing, and producing the first units of the product.
2. Pricing decisions
3. Distribution contracts
4. Promotional campaign development
IV. Implementation and Control

At this point in the process, the marketing plan has been developed and the product has
been launched. Given that few environments are static, the results of the marketing effort should
be monitored closely. As the market changes, the marketing mix can be adjusted to
accommodate the changes. Often, small changes in consumer wants can addressed by changing
the advertising message. As the changes become more significant, a product redesign or an
entirely new product may be needed. The marketing process does not end with implementation -
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continual monitoring and adaptation is needed to fulfill customer needs consistently over the
long-term.
Situation Analysis
In order to profitably satisfy customer needs, the firm first must understand its external
and internal situation, including the customer, the market environment, and the firm's own
capabilities. Furthermore, it needs to forecast trends in the dynamic environment in which it
operates.
A useful framework for performing a situation analysis is the 5 C Analysis. The 5C
analysis is an environmental scan on five key areas especially applicable to marketing decisions.
It covers the internal, the micro-environmental, and the macro-environmental situation. The 5 C
analysis is an extension of the 3 C analysis (company, customers, and competitors), to which
some marketers added the 4th C of collaborators. The further addition of a macro-environmental
analysis (climate) results in a 5 C analysis, some aspects of which are outlined below.
Company
1. Product line
2. Image in the market
3. Technology and experience
4. Culture
5. Goals
Collaborators
1. Distributors
2. Suppliers
3. Alliances
Customers
1. Market size and growth
2. Market segments
3. Benefits that consumer is seeking, tangible and intangible.
4. Motivation behind purchase; value drivers, benefits vs. costs
5. Decision maker or decision-making unit
6. Retail channel - where does the consumer actually purchase the product?
7. Consumer information sources - where does the customer obtain information about the
product?
8. Buying process; e.g. impulse or careful comparison
9. Frequency of purchase, seasonal factors
10. Quantity purchased at a time
11. Trends - how consumer needs and preferences change over time
Competitors
1. Actual or potential
2. Direct or indirect
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3. Products
4. Positioning
5. Market shares
6. Strengths and weaknesses of competitors
Climate (or context)

The climate or macro-environmental factors are:
1. Political & regulatory environment - governmental policies and regulations that affect the
market
2. Economic environment - business cycle, inflation rate, interest rates, and other
macroeconomic issues
3. Social/Cultural environment - society's trends and fashions
4. Technological environment - new knowledge that makes possible new ways of satisfying
needs; the impact of technology on the demand for existing products.
The analysis of the these four external "climate" factors often is referred to as a PEST analysis.
Information Sources
Customer and competitor information specifically oriented toward marketing decisions
can be found in market research reports, which provide a market analysis for a particular
industry. For foreign markets, country reports can be used as a general information source for the
macro-environment. By combining the regional and market analysis with knowledge of the
firm's own capabilities and partnerships, the firm can identify and select the more favorable
opportunities to provide value to the customer.
The Marketing Mix (The 4 P's of Marketing)

Marketing decisions generally fall into the following four controllable categories:
1. Product
2. Price
3. Place (distribution)
4. Promotion
The term "marketing mix" became popularized after Neil H. Borden published his 1964
article, The Concept of the Marketing Mix. Borden began using the term in his teaching in the
late 1940's after James Culliton had described the marketing manager as a "mixer of
ingredients". The ingredients in Borden's marketing mix included product planning, pricing,
branding, distribution channels, personal selling, advertising, promotions, packaging, display,
servicing, physical handling, and fact finding and analysis. E. Jerome McCarthy later grouped
these ingredients into the four categories that today are known as the 4 P's of marketing, depicted
below:
The Marketing Mix
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These four P's are the parameters that the marketing manager can control, subject to the internal
and external constraints of the marketing environment. The goal is to make decisions that center
the four P's on the customers in the target market in order to create perceived value and generate
a positive response.
Product Decisions
The term "product" refers to tangible, physical products as well as services. Here are some
examples of the product decisions to be made:
1. Brand name
2. Functionality
3. Styling
4. Quality
5. Safety
6. Packaging
7. Repairs and Support
8. Warranty
9. Accessories and services
Price Decisions
Some examples of pricing decisions to be made include:
1. Pricing strategy (skim, penetration, etc.)
2. Suggested retail price
3. Volume discounts and wholesale pricing
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4. Cash and early payment discounts

5. Seasonal pricing
6. Bundling
7. Price flexibility
8. Price discrimination
Distribution (Place) Decisions

Distribution is about getting the products to the customer. Some examples of distribution
decisions include:
1. Distribution channels
2. Market coverage (inclusive, selective, or exclusive distribution)
3. Specific channel members
4. Inventory management
5. Warehousing
6. Distribution centers
7. Order processing
8. Transportation
9. Reverse logistics
Promotion Decisions
In the context of the marketing mix, promotion represents the various aspects of marketing
communication, that is, the communication of information about the product with the goal of
generating a positive customer response. Marketing communication decisions include:
1. Promotional strategy (push, pull, etc.)
2. Advertising
3. Personal selling & sales force
4. Sales promotions
5. Public relations & publicity
6. Marketing communications budget
Limitations of the Marketing Mix Framework

The marketing mix framework was particularly useful in the early days of the marketing
concept when physical products represented a larger portion of the economy. Today, with
marketing more integrated into organizations and with a wider variety of products and markets,
some authors have attempted to extend its usefulness by proposing a fifth P, such as packaging,
people, process, etc. Today however, the marketing mix most commonly remains based on the 4
P's. Despite its limitations and perhaps because of its simplicity, the use of this framework
remains strong and many marketing textbooks have been organized around it.
Conducting Market Research

Prior to the launch of any new product, companies engage in exhaustively thorough
market research in order to gauge its probability of success. If your subjects are properly
selected, you can gain valuable information that may allow you to better temper your product for
the intended target audience. What are your considerations prior to starting market research?
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1. Demographics of your target geographical area – are you targeting the right region?
2. Price range and profit margin – will you make enough money from each sale?
3. Intended production volume – if you intend to take a higher volume approach, do you
have the facilities to back it up?
4. Age range, marital status, family – do you have a detailed sketch of your ideal customer
in mind?
5. Income and Lifestyle range – how much money will your average customer make?
6. Males, females or both – which sex are you focused on?
7. Seasonal, cyclical nature of your product – is your product marketable year-round or only
on certain occasions?
These may be bewildering questions at first. However, a well-run company should have a
marketing manager to coordinate appropriate market research with a marketing researcher. The
researcher and the manager define the objectives to be attained through the research. A well
known acronym in the world of marketing research is “DECIDE”, which is a quick way to
remember the steps of research.
1. Define the marketing problem
2. Enumerate the decision factors
3. Collect relevant information
4. Identify the best alternatives
5. Develop and implement a marketing plan
6. Evaluate the final decision
The marketing team should then develop the plan and outline the costs, to be presented to
the marketing manager for approval.
Now, with an approved market research in place, it’s time to address the two main forms
of market research:
Qualitative research:
an exploratory, limited way to gauge the needs of your target demographic,
focused on a smaller group with higher detail. These include focus groups and in-
depth interviews with selected individuals. An example of this would be to
approach a group of surfers at the beach with your surfboard designs, to gather a
small amount of high quality opinions from a dedicated group.
Quantitative research:
surveys of much larger groups with the intent of garnering hard statistics to use
for future financial plans. Examples of these are surveys conducted over the
phone, by mail and on the Internet. These results tend to be of lower quality and
diversity, but can be compiled quickly to formulate a larger picture of the targeted
area.
Ideally, a company would employ a mix of both kinds of research to gain the best
perspective on their customer base. There are many kinds of research – coolhunting, viral
marketing, concept testing, demand estimation and online panels are all methods market
researchers employ to garner results. The findings from the research should be compiled by your
marketing team through comprehensive charts and tables to be presented to management.
Once the marketing manager presents the final results, the company should move on to
the product testing phase.
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The product testing phase takes place after the completion of the product manufacturing
phase and before the product launch. This can be done on qualitative and quantitative bases as
well, but if you intend to use large groups for quantitative tests, you should be aware of the
physical constraints that were not there during the survey phase, as you must produce enough of
the product for testing purposes. A simple example of this is the software beta tester, who is
hired by a company to endlessly use the software in search of bugs and glitches. In this example,
you would need to devote a lot of manpower and hours to clean and temper your product. If your
product is something simpler, such as food, you need only serve your product and record a
survey response.
Market research may sound and feel like an overwhelming, costly operation, but it can be
done on a smaller scale for home and small businesses. If you don’t have a marketing team
ready to launch a research project, there are freely available reports online for a myriad of
products. These can include established research for automobiles, consumer spending habits and
restaurant choices, among others. You can also hire university students looking for a business
school class project or a few extra dollars. This would still be considerably cheaper than hiring a
professional marketing research firm.
On the other hand, if you have money to dedicate to market research but you don’t have a
full marketing team, consider hiring professionally contracted services or virtual assistants to get
the job done efficiently with little hassle.
PEST Analysis or STEP Analysis

A PEST analysis is an analysis of the external macro-environment that affects all firms.
P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the
external macro-environment. Such external factors usually are beyond the firm's control and
sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate
term for these factors. However, changes in the external environment also create new
opportunities and the letters sometimes are rearranged to construct the more optimistic term of
STEP analysis.
Many macro-environmental factors are country-specific and a PEST analysis will need to
be performed for all countries of interest. The following are examples of some of the factors that
might be considered in a PEST analysis.
Political Analysis
1. Political stability
2. Risk of military invasion
3. Legal framework for contract enforcement
4. Intellectual property protection
5. Trade regulations & tariffs
6. Favored trading partners
7. Anti-trust laws
8. Pricing regulations
9. Taxation - tax rates and incentives
10. Wage legislation - minimum wage and overtime
11. Work week
12. Mandatory employee benefits
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13. Industrial safety regulations

14. Product labeling requirements
Economic Analysis
1. Type of economic system in countries of operation
2. Government intervention in the free market
3. Comparative advantages of host country
4. Exchange rates & stability of host country currency
5. Efficiency of financial markets
6. Infrastructure quality
7. Skill level of workforce
8. Labor costs
9. Business cycle stage (e.g. prosperity, recession, recovery)
10. Economic growth rate
11. Discretionary income
12. Unemployment rate
13. Inflation rate
14. Interest rates
Social Analysis
1. Demographics
2. Class structure
3. Education
4. Culture (gender roles, etc.)
5. Entrepreneurial spirit
6. Attitudes (health, environmental consciousness, etc.)
7. Leisure interests
8.
Technological Analysis
1. Recent technological developments
2. Technology's impact on product offering
3. Impact on cost structure
4. Impact on value chain structure
5. Rate of technological diffusion
The number of macro-environmental factors is virtually unlimited. In practice, the firm

must prioritize and monitor those factors that influence its industry. Even so, it may be difficult
to forecast future trends with an acceptable level of accuracy. In this regard, the firm may turn to
scenario planning techniques to deal with high levels of uncertainty in important macro-
environmental variables.
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Small and Medium-Sized enterprise (SME’s)

Small and medium enterprise or small and medium-sized enterprise (SMEs, small and
medium-sized businesses, SMBs and variations thereof) are companies whose personnel
numbers fall below certain limits. The abbreviation "SME" is used in the European Union and by
international organizations such as the World Bank, the United Nations and the World Trade
Organization (WTO). The term "small and medium businesses" (or "SMBs") is predominantly
used in the USA. In most economies, smaller enterprises outnumber large companies by a wide
margin. SMEs are said to be responsible for driving innovation and competition in many
economic sectors.
In the United States, the Small Business Administration sets small business criteria based
on industry, ownership structure, revenue and number of employees (which in some
circumstances may be as high as 1,500, although the cap is typically 500).[2] Both the US and
the EU generally use the same threshold of fewer than 10 employees for small offices (SOHO).
Industry Canada defines a small business as one with fewer than 100 employees (if the
business is a goods-producing one) or fewer than 50 employees (if the business is service-based),
and a medium-sized business as one with fewer than 500 employees.
EU member states have had individual definitions of what constitutes an SME. For
example, the definition in Germany had a limit of 255 employees, while in Belgium it could have
been 100.
In July 2011, the European Commission said it would open a consultation on the
definition of SMEs in 2012. In Europe, there are three broad parameters which define SMEs:
micro-entities are companies with up to 10 employees; small companies employ up to 50
workers, whilst medium-sized enterprises have up to 250 employees. SMEs are also defined as
firms with either revenues of €10–50 million or a balance-sheet total of €10–43 million
Micro, Small and Medium Enterprises (MSMEs)

Globally, the definition of MSMEs varies from country to country, depending on
parameters considered best suitable to promote the sub-sector in each country.
In year 2001, after the Federal Ministry of Industry (FMI), had completed the review of
the Industry Policy Document, it came up with definition of MSMEs on the basis of employment
as follows:
1. Micro/ Cottage industries are industries with 1-10 workers
2. Small Scale industries are industries with 11-100 workers
3. Medium Scale industries are industries with 101-300 workers
4. Large Scale industries are industries with 301 workers and above
The FMI definition of the SMEs in Nigeria based on number of employees fits into the most
common standard measure used in industrialized countries.
On its own part, the National Council on Industry (NCI) at its 13th meeting held at
Makurdi, Benue State from 26-27 July, 2001 adopted new definitions of various industrial
classifications using capital cost cum labour force as a basis as follows:
1. Micro/ Cottage Industry
 An industry whose total cost is not more than N1.5 million including working
capital but excluding cost of land and/ or a labour size of not more than 10
workers;
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2. Small-Scale Industry
 An industry whose total cost is over N1.5 million but not more than N50 million,
including working capital but excluding cost of land and/ or a labour size of 11-
100 workers;
3. Medium Scale Industry
 An industry whose total cost is over N50 million but not more than N200 million,
including working capital but excluding cost of land and/ or a labour size of 101-
300 workers;
4. Large-Scale Industry
 An industry whose total cost is over N200 million, including working capital but
excluding cost of land and/ or labour size of over 300 workers.
Key Drivers Of MSME’s Sub-Sector In The Nigerian Economy

1. Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)
2. Bank of Industry Limited (BOI)
3. Central Bank of Nigeria (CBN)
4. National Agency for Science and Engineering Infrastructure (NASENI)
5. National Research Institute for Chemical Technology (NARICT)
6. National Board for Technology Incubation (NBTI)
7. National Biotechnology Development Agency(NABDA)
8. Raw Materials Research and Development Council (RMRDC)
9. Federal Institute for Industrial Research, Oshodi (FIIRO)
10. Project Development Agency (PRODA)
11. National Poverty Eradication Programme (NAPEP)
12. National Directorate of Employment(NDE)
13. Nigeria Export Processing Zones Authority (NEPZA)
14. Nigeria Export Promotion Council (NEPC)
15. Micro-finance Banks
Bank Of Industry (BOI)
Overview
The Bank of Industry Limited (BOI) is Nigeria's oldest, largest and a very successful
development financing institution. It was reconstructed in 2001 out of the Nigerian
Industrial Development Bank (NIDB) Limited, which was incorporated in 1964. The bank took
off in 1964 with an authorized share capital of 2 million (GBP).
The International Finance Corporation which produced its pioneer Chief Executive held
75% of its equity along with a number of domestic and foreign private investors. Although the
bank's authorized share capital was initially set at N50 billion in the wake of NIDB's
reconstruction into BOI in 2001, it has been increased to 250 billion in order to put the bank in a
better position to address the nation's rising economic profile in line with its mandate.
Following a successful institutional, operational and financial restructuring programme
embarked upon in 2002, the bank has transformed into an efficient, focused and profitable
institution that is well placed to effectively carry out its primary mandate of providing long term
financing to the industrial sector of the Nigerian economy.
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Products
1. Entertainment Fund
2. Short, medium and long-term financing
3. Lease Financing
4. Co-financing/Syndication Services
5. Business development support services
Who Can BOI Assist?

1. Small, medium and large enterprises, excluding cottage industries.
2. New or existing companies, seeking expansion, modernization or diversification.
3. Credit worthy promoters who will be required to prove their commitment to the project
by contributing at least 25% of the project cost excluding land.
4. Borrowers whose management capability, financial situation (including availability of
collateral and guarantee), character and reputation are incontrovertible.
5. Clients with demonstrable ability to meet loan repayments.
6. Borrowers with no record of unpaid loans to erstwhile development finance institutions
and other banks.
Some of the achievements of BOI are as follows:

Establishment of US-BOI AGOA Resource Centre (ARC) The US-BOI AGOA Resource Centre
(ARC) was officially commissioned on 9th June, 2009. The center is equipped with computers
and internet facilities, a library and a meeting room which is opened to members of the public
and business community.
The ARC provides an essential interface between potential Nigerian exporters and their United
States and European counterparts using the extensive network and support of the West Africa
Trade Hub based in Accra, Ghana.
AGOA (African Growth Opportunity Act) is a Statutory Trade Preference Program that
allows duty-free entry of certain goods from Sub-Saharan Africa countries. It is a comprehensive
program of Trade preferences unilaterally applied by the United States. It was signed into law
May 18, 2000 as part of the Commerce & Development Act of 2000. “AGOA III” extends
legislation beyond its current expiration date of 2008 to 2015.
AGOA presents duty and quota free incentives to over 6,400 products. A total of 4600 of
these products qualify for elimination of tariffs under the Generalized System of Preferences
(GSP) of the U.S.A and an additional 2000 products now included under AGOA that are “import
sensitive” under the GSP. Nigeria and thirty-eight of the 48 Sub-Saharan African countries are
eligible for AGOA. Nigeria secured its AGOA eligibility in October 2, 2000.
AGOA presents duty and quota free treatment to over 6400 products which can be categorized
into six (6) major sectors as follows:
1. Cashew e.g. raw, roasted, salted
2. Shea e.g. Shea butter- bulk and finished products
3. Home Decor & Fashion Accessories e.g. Furniture and wood products, hand-crafted
pottery and baskets, leather handbags and shoes
4. Apparel e.g. Hand-woven cloth, ethnic printed fabrics, silver and beaded jewelry
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5. Specialty Foods e.g. Boxed fruit juices, chips and cassava by products, vegetables, honey,
palm-oil, spices
6. Sustainable Fish & Seafood e.g. Frozen, Dried or smoked fish, snail, shrimp
Benefits of The US-BOI AGOA Resource Center

1. The ARC increases the awareness and understanding among the private sector of the
advantages set by AGOA.
2. The ARC increases access to resources and capacity of exporters by identifying export-
ready companies and referring them to the West Africa Trade Hub based in Accra, Ghana
for eventual participation in International trade shows and market linkage activities.
3. The ARC works strategically with the public and private sectors to define and implement
national export strategies.
4. The ARC provides of first-level business clinic for potential exporter every last Friday of
the month.
5. The ARC provides information on how Export-Ready Companies can have access to
Finance to grow their business.
BOI/UNDP Access To Renewable Energy Programme

UNDP and BOI launched US$4m Access to Renewable Energy (AtRE) Project on 16th
June 2011 at Abuja. The project is targeted, mainly, at MSMEs as well as small, rural and urban
settlements. It is expected to facilitate access to affordable and reliable renewable energy that is
independent of the national grid.
The absence of reliable power and energy supply is an established challenge for MSME
operations in Nigeria. Most private sector institutions rely on back-up generators with high
environmental and economic cost. Renewable Energy remains an effective option for the future
energy supply towards the improvement of MSME and household access to hydro, wind, solar
power, biomass and geothermal energy.
BOI/UNDP Access to Renewable Energy Programme focuses on increasing the
National capacity to invest in- and utilize renewable energy resources to improve access to
modern energy services for MSMEs and households.
Improving the regulatory, institutional, and financing framework to promote Renewable
Energy option is of importance to facilitate MSMEs growth that will deliver quality economic
growth and development.
The BOI/UNDP Access to Renewable Energy Programme is an intervention project
aimed at catalyzing, promoting and supporting an expansion of off the grid renewable energy
services for MSMEs to support private sector-led economic development.
PROJECT OUTCOMES
1. OUTCOME 1: Improved access to reliable and renewable energy service options for
MSMEs
2. OUTCOME 2: Developed capacity of stakeholders to facilitate investments in the
renewable energy sector
3. OUTCOME 3: Policy level dialogues established and maintained
a. Output 3.1: Dialogue to influence renewable energy policy development
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b. Output 3.2: Dialogue to support renewable energy planning and strategy development
BOI Milestones As Manager Of Specialized Development Funds

Sixty months after the launch of its Paradigm Shift in January 2006, the Bank of Industry
Ltd has continued to witness unprecedented expansion in its credit operations.
While the cumulative number of approved loans and investments grew by 1125% from
88 as at December 2010, the value of fresh loans and investments rose by 1066.3% from N9.8
billion to N114.3 billion within the same period. The percentage of its annual lending to MSMEs
increased to 96% by December 2010 from 35% in 2005.
Some of the key specialized development funds managed by BOI most of which have
significant impact on the MSMEs include the following:
1. CBN N500b intervention fund for the Power & Aviation Sector and Re-financing/Re-
structuring of Bank loans to the Manufacturing Sector.
2. US$500m Nigerian Small Growing Business Loan Scheme
3. N100b Cotton, Textiles and Garment Industry Revival Scheme
4. FG’s N10.0b Rice Processing Special intervention fund
5. N18b National Automotive Development Fund (NADF)
6. N5b MSMEs Business Development Fund on behalf of Dangote Foundation
7. MSMEs funds of N3b on behalf of 9 State governments
8. N200m Sugar Development Fund
9. N90m Business Development Fund for Women (BUDFOW) managed on behalf of the
Federal Ministry of Women Affairs and Youth Development
10. N50m pilot fund on behalf of SMEDAN
Central Bank Of Nigeria(CBN)
Entrepreneurship Development Centers

As part of the Central Bank of Nigeria’s overall objective of supporting the Federal
Government’s efforts in combating youth unemployment and fostering economic development,
the CBN established Entrepreneurship Development Centres (EDC) in the six geo-political
Zones of Nigeria; North-West, North-Central, North-East, and South-East, South-West, South-
South. The Entrepreneurship Development Centre model focuses on skills-based
Entrepreneurship training for tertiary and secondary school graduates who are desirous of
generating self-employment through start-up or expansion of business ventures. The EDCs
located at the following centres are to be evaluated by consultants to further improve their
effectiveness:
1. North-West : Kano, Jigawa, Zamfara, Katsina, Kaduna, Sokoto, Kebbi
2. South-East : Nsukka, Onitsha
3. South-West : Lagos
Other Objectives of the Entrepreneurship Development Centers:

1. To develop entrepreneurship spirit among Nigerian youths and provide insight into the
tools, techniques and framework for managing business enterprise, including production,
marketing, personnel and finance
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2. To develop skills of would-be –entrepreneurs to successfully start, expand, diversify and

manage business enterprises as well as link them with financial institutions for accessing
start-up capital
3. To generate employment opportunities for Nigerians in pursuance of the provisions of the
National Economic Empowerment and Development Strategy (NEEDS), vision 2020 and
the recent Transformation Agenda of the Federal Government.
Provision of Intervention Fund

The Central Bank of Nigeria launched a N500 billion intervention fund of which N200
billion was allocated to the manufacturing sector to unlock the credit market. The Fund which is
managed by the Bank of Industry provided relief, to certain extent, to some manufacturers
through the refinancing of their existing loans with Deposit Money Banks (DMBs) at generous
interest rate of 7% per annum and at long The Fund which is managed by the Bank of Industry
provided relief, to certain extent, to some manufacturers through the refinancing of their existing
loans with Deposit Money Banks (DMBs) at generous interest rate of 7% per annum and at long
repayment tenor of between 10-15 years. That was a worthwhile initiative on the part of CBN.
Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)

SMEDAN was established by the SMEDAN Act of 2003 to promote the development of
the MSME sector of the Nigeria Economy.
SMEDAN’s Mandate
The mandate of SMEDAN as contained in the enabling Act can be summarized as follows:
1. Stimulating, monitoring and coordinating the development of the MSMEs sub-sector;
2. Initiating and articulating policy ideas for small and medium enterprises growth and
development;
3. Promoting and facilitating development programmes, instruments and support services to
accelerate the development and modernization of MSME operations;
4. Serving as vanguard for rural industrialization, poverty reduction, job creation and
enhanced livelihoods;
5. Linking MSMEs to internal and external sources of finance, appropriate technology,
technical skills as well as to large enterprises;
6. Promoting and providing access to industrial infrastructures such as layouts, incubators,
industrial parks;
7. Intermediating between MSMEs and Government [SMEDAN is the voice of the
MSMEs];
8. Working in concert with other institutions in both public and private sector to create a
good enabling environment of business in general, and MSME activities in particular.
In order to effectively deliver on its mandate, SMEDAN has resuscitated/established 22

industrial development centres in the following States of the Federation and Federal Capital
Territory (FCT): Bauchi, Ogun (Abeokuta), Lagos, Sokoto, Niger(Minna), Edo, Ondo, Kano,
Abuja, Katsina, Enugu, Akwa Ibom(Uyo), Adamawa(Yola), Cross River(Ogoja),
Plateau(Jos),Rivers, Kwara, Kaduna, Osun(Osogbo), Bornu, Benue(Makurdi), Imo(Owerri)
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Some of the achievements of SMEDAN are as follows:

SMEDAN, AKZA Micro-finance Bank partner to facilitate MSMEs Development:
SMEDAN and the Azsa Microfinance Bank have signed a Memorandum of Understanding
(MOU) to develop a seamless intervention between the provision/acquisition of entrepreneurial
training and access to finance by MSMEs. (7 Source: www.smedan.gov.ng)
In line with the objective of the MOU, SMEDAN would provide entrepreneurial training
and other Business Development Services (BDS) such as mentoring and counselling, link trained
MSMEs to Azsa Micro Finance Bank for the provision of funding and advocate the issues and
challenges of Micro Finance Banks (MFBs) on the National Micro Finance Policy Consultative
Committee.
On its part, Azsa Micro Finance Bank would, according to the MOU, provide credit
and/or debt and equity financing facilities to MSMEs trained by SMEDAN that satisfy the
lending criteria of the MFB, maintain a register of MSMEs that have benefited from the MFB’s
facilities and recommend some of its customers to SMEDAN for training and entrepreneurial
skill enhancement programs of the Agency.
SMEDAN And Voluntary Services Overseas Partner For Under-Privileged

Empowerment
The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and
Voluntary Services Overseas (VSO) signed an MOU aimed at establishing and implementing an
Agricultural Development
Project branded SMEDAN-VSO Agro-Enterprise Development Project (S-VAP)
The project, targeted at women farmers and unemployed youths between the ages of 18
and 35, would be established in five pilot States in Nigeria including Nasarawa, Plateau, Ondo,
Kaduna and Cross-River States to add value to the development of micro, small and medium
enterprises (MSMEs) specifically and the country’s economy in general.
According to the MOU, SMEDAN shall be responsible for providing capacity-building
through entrepreneurship development training programs with specific focus on women farmers
while VSO would provide the technical assistance required to foster crop yield and quality
through access to improved seeds/seedlings that are well adapted to the different agro-ecologies
in the pilot States.
Both parties shall, however, link small-scale farmers to existing and new markets provide
them with needed information to improve their business decisions, and support research, data
collection and policy analysis related to agricultural development.
SMEDAN and Corporate Affairs Commission (CAC) Agree On Simplifying

Business Registration
SMEDAN and CAC resolved to enter into a partnership to simplify and fast-track
business registration processes for micro, small and medium enterprises [MSMEs], a significant
step towards the formalization of the nation’s largely informal economy.
Under the partnership, SMEDAN would deploy desk officers to CAC’s Head Office and
State Offices nationwide to handle registration procedures on behalf of small business operators.
The implication is that small business operators would no longer need to engage lawyers to
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register their companies with CAC, a practice that had, hitherto, increased the cost of
registration. The Corporate Affairs Commission, on the other hand would be expected to send its
Staff to serve as resource persons during SMEDAN’s Entrepreneurship Training Programmes
[ETPs] to educate prospective and existing entrepreneurs on business registration issues. The
partnership would, therefore, reduce the cost of business registration and make the process faster.
As part of making the mutual relationship effective, CAC would fund some workshops for SMEs
as part of its social corporate responsibilities.
The two bodies agreed that everything relating to the development of SMEs in the
country needed to be fast-tracked to create the right environment for more Nigerians to be self-
reliant, especially the restive youths who take to various vices as a result of poverty and
unemployment.
SMEDAN, Nigerian Film Corporation Partner On Entrepreneurship

To lift film-making industry from the realm of entertainment to the pinnacle of business,
SMEDAN and the Nigerian Film Corporation [NFC] signed a Memorandum of Understanding
[MOU], a step expected to make the industry contribute significantly to the nation’s economic
growth and development.
In implementing the MOU, SMEDAN is expected to impact entrepreneurial skills on
practitioners in the sector to enable the film industry make meaningful contribution to the overall
economic development of the country. In particular, SMEDAN would assist with its various
workshops and specific training programmes for practitioners in the sector for us to reap the full
benefits of increased film production, post-production, distribution and marketing as well as film
exhibition The two bodies noted that film is a business capable of generating huge revenue
which could contribute to the growth of the nation’s Gross Domestic Product (GDP). The two
bodies also noted that if the business potentials of film are fully harnessed and adequately
developed, the industry could become one of the highest revenue-generating sectors of the
economy as obtained in the United State of America, particularly California.
SMEDAN would support NFC with funding windows available to Nigerian entrepreneurs
such as the SME Credit Guarantee Scheme introduced by the Central Bank of Nigeria (CBN)
and the funding scheme of the National Economic Reconstruction Fund (NERFUND).
The areas of training/capacity building, development of business models for entrepreneurs in the
film sector, linking film-makers to local and international sources of finance, product
competitiveness and market standard development were catered for in the MOU. 8 (8Source:
www.smedan.gov.ng)
SMEDAN And Collaborating Agencies

SMEDAN collaborates with a number of agencies and corporate bodies in order to
effectively deliver on its mandate. Among the agencies are those whose activities have direct
impact on MSMEs promotion such as RMRDC, FIIRO, PRODA, NASENI, NARICT, NABDA,
NBTI, etc. Chemical Engineers and other entrepreneurs are at liberty to access the process
technologies developed by these agencies and seek assistance from SMEDAN towards
commercialization.
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Potential Niches For Chemical Engineers And Other

Entrepreneurs In MSMEs
The report on Economic Survey of Small and Medium Industries in Nigeria, 2004
released by the CBN provides a large number of potential projects which can be embarked upon
by Chemical Engineers and other entrepreneurs in SMEs sub-sector. Tables A - K provide list of
projects. The list, though not exhaustive, should serve as a toast for Chemical Engineers and
others who are desirous of investing in MSMEs
TABLE A: List Of Projects For Investment In SMEs
A Food, Beverages and Tobacco
1 Baking plant
2 Cereal flaking plant
3 Fermented maize meal
4 Carbonated beverages plant
5 Vegetables dehydrated plant
6 Sugar extraction and sugarcane processing
7 Glucose making plant
8 Palm Oil/Kernel plant
9 Cereal milling plant
10 Frozen fish plant
11 Cassava starch making plant
12 Fresh milk making plant
13 Concentrated fruit juice making plant
14 Assorted animal feeds
15 Tomato Ketchup making plant
16 Candy making plant
17 Garri making plant
18 Cassava flour production plant
19 Cassava chips/pellets production plant
20 Biscuit production plant
21 Corn chips plant
22 Soy-ogi production plant
23 Palm wine bottling plant
24 Rice parboiling plant
25 Plantain chips/sticks production plant
26 Yam flour production plant
27 Powdered yam plant
28 Coconut oil plant
29 Desiccated coconut plant
30 Orange peel oil production plant
31 Jam and marmalade plant
32 Pectin production plant
33 Egg powder production plant
34 Dried/smoked fish plant
35 Seasoning and condiment plant
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TABLE A: List Of Projects For Investment In SMEs

A Food, Beverages and Tobacco
36 Commercial food mixers plant
37 Banana figs and powder (flavour)production plant
38 Instant noodle production plant
TABLE B: List Of Projects For Investment In SMEs

B Textiles, Clothing and Leather
1 Cotton yarn (weaving)
2 Garment manufacturing plant
3 Terry towel pant
4 Mosquito nets
5 Tanning of hides and skin
TABLE C: List Of Projects For Investment In SMEs

C Wood and Wood Products
1 Toothpick making plant
2 Charcoal production plant
TABLE D: List Of Projects For Investment In SMEs

D Pulp, Paper and Paper Products
1 Toilet paper making plant
2 Pencil production plant
3 Corrugated fibre board
TABLE E: List Of Projects For Investment In SMEs

E Chemical and Pharmaceuticals
1 Office cum paste productions plant
2 Industrial alcohol production plant
3 Modified starch plant
4 Laundry soap production plant
5 Toilet soap production plant
6 Liquid soap plant
7 Hair oils production plant
8 Bone meal plant
9 Gelatin plant
10 Cashew oil production plant
11 Blood meal production plant
12 Basic dyes production
13 Wax candles production
14 Copper sulphate production
15 Precipitated silica
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TABLE E: List Of Projects For Investment In SMEs

E Chemical and Pharmaceuticals
16 Caustic soda production
18 Mini fertilizer blending plant
19 Protective paints plant
20 Zinc oxide plant
21 Paracetamol and paraminophenol plant
22 Wood preservative plant
23 Essential oils production
24 Aluminium sulphate
TABLE F: List Of Projects For Investment In SMEs

F Non Metallic Mineral Products
1 Refractory brick plant
2 Pottery manufacture
3 Manufacture of ceramic wall and floor tiles plants
4 Porcelain electrical insulators plant
5 Sanitary plant
6 Water filter candles
7 Bitumen impregnated corrugated roofing sheets
8 Red brick manufacture plant
9 Flooring Tiles ( Clay) Plant
10 Mini cement production
11 Classroom Chalk making
12 Hydrated lime production plant
13 Industrial mineral grinding plant
14 Granite/marble cutting and polishing
15 Powder(filler) production
16 Bentonite processing plant
17 Ceramic art ware and toys manufacturing plant
18 Gemstone cutting and polishing plant
19 Kaolin processing(BP grade)
20 Crushed granite plant
TABLE G: List Of Projects For Investment In SMEs

G Plastic and Rubber Product
1 Plastic furniture product
2 Polypropylene(produce)bags
3 Plastic footwear
4 Plastic storage tank
5 Surgical gloves plant
6 Fountain pens and Ball Point Pens Plant
7 Plastic Button Production Plant
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TABLE H: List Of Projects For Investment In SMEs

H Basic Metal, Iron &Steel
1 Metal Fasteners Plant
2 Agricultural Implements Plant
3 Foundry(Non ferrous)
4 Pins, Staples and Clips Plants
5 Metal product making plant
6 Metal canopy construction
7 Hand pumps and accessories production
8 Electroplating plant
9 Aluminum doors and windows plants
10 Suspended ceilings making plant
11 Railings and burglar proof construction
12 Brick presses making plant
13 Wrought iron making plant
14 Structural steel items plant
15 Storage tanks fabrication plant
16 Aluminum cooking ware making plant
17 Hospital furniture making plant
18 Pins, Staples and Clips Plant
TABLE I: List Of Projects For Investment In SMEs

I COMPUTER & ACCESSORIES
1 Computer accessories making plant
2 Main components and peripherals plant
3 Networking gadgets making plant
4 Handsets manufacturing plant
5 Software and hardware making plant
6 Telecom equipment manufacturing plant
TABLE J: List Of Projects For Investment In SMEs

J SOLID MINERALS & CONCRETE WORKS
1 Kaolin processing plant
2 Concrete block making plant
3 Dolomite processing plant
4 Concrete pole and pile making plant
5 Gypsum board making plant
6 Calcite processing plant
7 Aggregate plant
TABLE K: List Of Projects For Investment In SMEs

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K FOAM AND FOAM PRODUCTS

1 Cellophane tape making plant
2 Carbon paper making plant
3 Mattress making plant
4 Bed Sheetings Plant
5 Wall and desk decorations making plant
Summary of the Entrepreneurial Business
Important Points in Entrepreneurship

1. Know yourself
2. Know your business
3. Know marketing
4. Know financial management
5. Most importantly, Know how to write a business plan
i. for planning purposes
ii. To raise funds
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General Assessment of MSMEs In Nigeria

Nigeria is not left out as part of the changing world economy which yearns for a more
articulated policy on the SMEs. Most world economies are characterized by a large number of
micro/ cottage, small and medium scale enterprises (MSMEs) mainly in the informal sector. In
many economies, they account for a large segment of productive population. Nigeria falls within
this latter category of economies. The MSMEs in Nigeria account for over 95 percent of non-oil
productive activities outside agriculture which positions them as potentially strong agents of
economic growth and sustainable development.
Thus the post-independence development of industrial sector in the 1960’s and 1970’s
concentrated on Large Scale Industries (LSIs), to which substantial direct government
investments were committed in partnership with multi-national companies. The collapse of the
oil boom in the early 1980’s drastically reduced foreign exchange earnings allocated for the
importation of raw materials and spare parts for these import-dependent industries. Products
from these industries comprise consumer goods, intermediate and capital goods such as iron and
steel, machine tools, pulp and paper, petrochemicals and automobiles.
Following the collapse of the oil boom in the early 1980’s, Nigeria witnessed a drastic
reduction in capacity utilization in most of the manufacturing plants between 1983 and 1996.
This led to massive retrenchment, general scarcity of basic/ essential commodities and the
devaluation of the local currency (Naira). This serious setback in industrial development resulted
in a decline to the contribution to GDP from 11.2 per cent in 1982 to 6.1 per cent in 1999.
This situation of economic depression informed the adoption of the Structural
Adjustment Programme (SAP) in 1986 and the new industrial policy in 1988, which accorded
pivotal role to the private sector and shifted the priority focus of from large scale industries
(LSIs) to small and medium enterprises (SMEs).
The new industrial policy recognized the promotion of SMEs as a more appropriate
strategy for achieving targets of industrial self-reliance, employment generation and poverty
alleviation. This position, on the strategic role of SMEs in the growth process, is widely accepted
because of their greater capacities for use of locally available raw materials, technologies and
manpower as well as for their promotion of industrial dispersal and balanced development.
Hence the major interventions in SME development under the new industrial policy occurred
between 1987 and 1989 when the Federal Government mobilized substantial loanable funds for
SME development through the NBCI, NIDB, Community Banks, NACB,
FEAP, NERFUND, the World Bank SME II Project and the Peoples Bank of Nigeria. By
the mid 1990s, however, the funds available to these institutions had virtually dried up and most
of the SME Projects set up with these loans had also collapsed due to the inflated foreign
exchange debt burden and the local currency devaluation.
The above scenario explains why the contributions of SMEs to the industrialization
process in Nigeria are generally low compared to the counterparts in South East Asia and
elsewhere. A number of factors both internal and external have worked against SME
development in Nigeria. The external factors include:
1. Unstable macro-economic environment
2. Inconsistent character of policy measures
3. Poor implementation and co-ordination efforts on SMEs
4. Absence of sustainable institutional mechanism
5. Poor infrastructural facilities, that is, road/ railway systems, water supply and electrical
power
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6. Lack of effective financial support systems
In addition to the foregoing, the SMEs in Nigeria are also handicapped by their peculiar internal
characteristics, which manifest in the following forms, namely:
1. Lack of equipment, which are mostly imported at great cost with attendant risks of late or
uncertain arrival and non-availability of spare parts and maintenance personnel. In
addition, these imported equipment are not easily adaptable to traditional processes and
their scales of operation;
2. Lack of process technologies, designs, patents, etc., that may involve payment of
royalties, technology transfer fees, etc.;
3. Low levels of technical skills in the form of technological, managerial, entrepreneurial
and strategic capabilities;
4. Inability to compete, either because of saturated home markets with dumped goods and
cheap imports, poor quality of their products or unfamiliarity with export market
strategies and networks;
5. Inability to meet stringent quality requirements set by some developed countries,
sometimes a subtle form of trade barrier.
6. Lack of production resources, especially finance.
As far back as May 1999, the new government in the democratic dispensation initiated a
number of new strategies to ameliorate the various constraints militating against the effective
contribution of SMEs to the industrial development of the country. The Federal Government
having recognized the rapid changing global environment moving towards deregulation,
knowledge- based economy, borderless trade and investment set out to institute a comprehensive
and integrated framework with sustainable support system, capable of addressing the problems
mentioned above and promoting a virile SME sub-sector that would be well structured,
organized, modernized competitive in local and international markets, oriented to productivity
and employment generation, environmentally friendly, vertically and horizontally linked inter
and intra-sectorally with multinational corporations and a veritable training ground for new
generation of entrepreneurs.
Some of the actions of Government covered the following activities:

1. Strengthening Private Sector Organizations (PSOs) such as:
i. Nigerian Employers Consultative Association (NECA)
ii. Manufacturers Association of Nigeria (MAN)
iii. National Association of Small Scale Industrialists (NASSI)
iv. National Association of Chambers of Commerce, Industries, Mines and
Agriculture (NACCIMA)
v. National Association of Small and Medium Enterprises (NASME)
Government’s expectations from these Organizations were:5

a. Joining with government as partners in progress in implementing policies on
poverty eradication, appropriate living wage and salaries, contribution of
realistic inputs into budget preparation and implementation, establishment of
National Credit Guarantee Scheme and Clusters Networking
b. Sub-contracting and linkages with the SMEs in order to enhance the rapid
growth and development of the sub-sector.
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2. Repositioning/ Revitalization of Industrial Development Centres (IDCs)
3. Establishment of Small and Medium Industries Development Agency(SMIDA) later

transformed to Small and Medium Enterprises Development Agency of Nigeria
(SMEDAN)
4. Funding of SMEs through various schemes
Despite of the efforts put in by Government to re-vamp the MSME’s sub-sector over
these past years, the Honourable Minister of Trade and Investment summed up his assessment in
the World Economic Forum meeting at Addis Ababa on 10th May 2012 as follows: “Micro,
Small and Medium Enterprises remain the backbone of the development of any economy and the
driving force of national growth. In Nigeria, there are currently over 17 million Micro, Small and
Medium Enterprises in the country, employing over 31 million Nigerians. They account for over
80 per cent of the total number of enterprises in Nigeria and employ 75 per cent of the total
workforce’.
But their contribution to the nation’s GDP is still relatively low, due to major constraints
in the operating environment, which have limited their abilities to create jobs and perform the
vital role of enhancing economic growth and development” He, however, noted that in the next
three years, Nigerians should expect more SMEs with enhanced productivity. 6
In effect, the Minister was saying that much still needs to be done to enhance the capacity
of the MSMEs to contribute appreciably to economic growth, concluding that the outlook would
be positively different in the sub-sector within three years. Following the Minister’s optimistic
stance, there is need to examine the activities of key organizations which have direct impact on
the effectiveness of the MSME’s sub-sector. Perhaps the effectiveness of these organizations
would translate to the effectiveness of the MSMEs and by extension the growth of the nation’s
GDP.
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Entrepreneurial Opportunities In Chemical Engineering (in

Nigeria)
Industries Hiring Chemical Engineering
The figures below are the United States of America, however, the figures give a general feeling
of the area where chemical engineering can be applied in Nigeria.
Areas of Opportunity
This list is not exhaustive
1. Oil and Gas industry
2. Food Processing
3. Water Industry
4. Palm Oil Reprocessing
5. Cassava Cakes
6. Lime Production
7. Mineral Processing
8. Soap Production
9. Metal Recycling
10. Investment Casting
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11. Biogas industry

12. Bio-diesel Industry
13. Paint
14. Pulp and Paper
15. Palm Kernel Shell Processing
Food Processing
This is probably the area with the highest potential since around 60% of farm products
perish and many products such as yam, cassava, pepper, tomatoes, maize can be processed on a
small scale. there are now various brands of yam flower, pandoyam, plantain flour, beans flour,
on the market. all these involve unit operations and can be initiated on a small scale. there are
also opportunities in sorting and packaging of beans, gari manufacture and packaging.
Palm Oil Reprocessing

there is a strong potential local and export market for neatly bottled palm oil which has been
chemically re-processed to remove harmful cholesterol .
Palm Kernel Shell Processing

These can be made into briquettes when mixed with sawdust, rice hulls corncobs, etc.
Cassava Cakes
There is a major opportunity in cassava cake production. Government has directed that made-in-
Nigeria bread must contain at least 10% cassava flour but the major wheat flour manufacturers
cannot find suppliers. Also there is a major export opportunity – many countries including china
want our cassava cakes. Cassava cake production involves simple unit operations such as
grating, drying and crushing but process variables must be closely controlled. For example
cassava not processed within 24 hours of harvesting will not produce cake or flour of acceptable
quality and residual moisture must be closely controlled in the drying process
Lime Production
Limestone (calcium carbonate) deposits abound in the country, used mainly for cement
manufacture. However, water processing plants, paint manufacturers need calcined lime
(calcium oxide) which can be easily produced from this raw material by heat treatment.
Mineral Processing
Many minerals are being mined especially in the south-east and north, and exported raw with no
added value. Simple beneficiation processes such as grinding, floatation, can be applied to
upgrade the ores and significantly raise the value for export.
Soap Production
Soap production is a simple chemico-mechanical process and many small scale producers
abound. All the raw materials are available locally (though some of them are imported), and
required equipment is manufactured locally.
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Metal Recycling
Discarded metals – copper, aluminium, lead, steel, etc can be recycled very profitably.
Aluminium is being recycled by traditional cooking pots makers but a good entrepreneur can
grow a profitable business recycling waste drink cans, discarded lead-acid batteries (to recover
the lead), cast iron (for foundries or export), steel (for local steel makers or export).
Paint
Raw material for paint is imported, there is an opportunity to developed the use of local materials
for paint manufacture
Pulp and Paper
Biogas
Biodiesel
Water
There is not enough portable water in Nigeria
Page 107 of 117
About Microfinance
Microfinance is a general term to describe financial services to low-income individuals or to those
who do not have access to typical banking services.
Microfinance is also the idea that low-income individuals are capable of lifting themselves out of
poverty if given access to financial services. While some studies indicate that microfinance can play
a role in the battle against poverty, it is also recognized that is not always the appropriate method,
and that it should never be seen as the only tool for ending poverty.
Table of Contents
I. Overview
I. What is microfinance?
II. The history of modern microfinance
II. Microfinance providers
I. Microfinance Institutions
II. Why don't banks serve poor people?
III. Costs, interest rates and sustainability
I. Interest rates (they're high)
II. Profitability and sustainability of MFIs
IV. Microfinance impact and outcomes
I. Evidence that microfinance works
II. Microfinance: a good tool for empowering women
III. Microfinance is not a silver bullet
IV. Examples of some alternative strategies
V. How can I learn more?
I. Additional resources
II. Become a Kiva lender
Page 108 of 117
I. Overview
What is microfinance?
Florinda Agustina Garcia Lopez sells aprons in

Guatemala. She takes out microloans to grow
her business and hopes to provide improved
living conditions for her children.
Microfinance is the supply of loans, savings, and other basic financial services to the poor.
(http://cgap.org)
As these financial services usually involve small amounts of money - small loans, small savings, etc.
- the term "microfinance" helps to differentiate these services from those which formal banks provide.
Why are they small? Someone who doesn't have a lot of money isn't likely to want or be able to take
out a $50,000 loan, or be able to open a savings account with an opening balance of $1,000.
It's easy to imagine poor people don't need financial services, but when you think about it they are
using these services already, although they might look a little different.
Poor people save all the time, although mostly in informal ways. They invest in assets such as gold,
jewelry, domestic animals, building materials, and things that can be easily exchanged for cash.
They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or
stash it under the mattress. They participate in informal savings groups where everyone contributes
a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating
Page 109 of 117
basis. Some of these groups allow members to borrow from the pot as well. The poor also give their
money to neighbors to hold or pay local cash collectors to keep it safe.
However widely used, informal savings mechanisms have serious limitations. It is not possible, for
example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind
savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness
(in the case of livestock). Informal rotating savings groups tend to be small and rotate limited
amounts of money. Moreover, these groups often require rigid amounts of money at set intervals
and do not react to changes in their members' ability to save. Perhaps most importantly, the poor are
more likely to lose their money through fraud or mismanagement in informal savings arrangements
than are depositors in formal financial institutions. (http://cgap.org)
The poor rarely access services through the formal financial sector. They address their need for
financial services through a variety of financial relationships, mostly informal. (http://cgap.org)
The history of modern microfinance
Percentage of Population living on less than $1 a day (http://wikipedia.org)
Credit unions and lending cooperatives have been around hundreds of years. However, the
pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began
experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a
professor of economics at Chittagong University in the 1970s. He would go on to found Grameen
Bank in 1983 and win the Nobel Peace Prize in 2006. (http://globalenvision.org)
Since then, innovation in microfinance has continued and providers of financial services to the poor
continue to evolve. Today, the world bank estimates that about 160 million people in developing
countries are served by microfinance. (http://web.worldbank.org)
back to top
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II. Microfinance providers

Microfinance Institutions
A microfinance institution (MFI) is an organization that provides microfinance services. MFIs range
from small non-profit organizations to large commercial banks.
Historical context can help explain how specialized MFIs developed over the last few decades.
Between the 1950s and 1970s, governments and donors focused on providing subsidized
agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. During
the 1980s, micro-enterprise credit concentrated on providing loans to poor women to invest in tiny
businesses, enabling them to accumulate assets and raise household income and welfare. These
experiments resulted in the emergence of nongovernmental organizations (NGOs) that provided
financial services for the poor. In the 1990s, many of these institutions transformed themselves into
formal financial institutions in order to access and on-lend client savings, thus enhancing their
outreach." (http://cgap.org)
Why don't banks serve poor people?
World population with access to finance (http://worldbank.org)

Formal financial institutions were not designed to help those who don't already have financial assets
- they were designed to help those who do. So what do poor people do?
Credit is available from informal commercial and non-commercial money-lenders but usually at a
very high cost to borrowers. Savings services are available through a variety of informal
relationships like savings clubs, rotating savings and credit associations, and mutual insurance
societies that have a tendency to be erratic and insecure." (http://www.cgap.org/about/faq)
Some banks do provide these services, however. Grameen Bank in Bangladesh was formed out of a
project providing small loans to women in the village of Jobra. Bancosol, a commercial bank in
Bolivia, is also a bank which provides microfinance services for the poor of Bolivia.
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However, the majority of formal banks do not provide microfinance products as microfinance is an
expensive enterprise - you can make a lot more money on a large loan than a small loan, and you
won't make much money holding savings accounts with very little funds in them. Banks can make
more money if they only provide financial services to those who already have money.
back to top
III. Costs, interest rates and sustainability
Interest rates (they're high)
Sikiratou Salami is from Togo, she took a loan

out to purchase supplies for her cosmetics
business and plans to use part of her profits
to finance the schooling of her three children.
There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost
of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For
instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1%
of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500.
An interest rate of 11% of the loan amount thus covers both these costs for either loan."
The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost
of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require
roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing
the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost
is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would
need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To
break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is
an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially
when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan
sizes get very small, transaction costs loom larger because these costs can't be cut below certain
minimums. (http://www.cgap.org/about/faq)
Page 112 of 117
Profitability and sustainability of MFIs

Some worry that an excessive concern for profit in microfinance will lead MFIs away from poor
clients to serve better-off clients who want larger loans. It is true that programs serving very poor
clients are somewhat less profitable than those reaching better-off clients, but this may say more
about managers' objectives than an inherent conflict between serving the very poor and profitability.
MFIs serving the very poor are showing rapid financial improvement. Microfinance programs like
Bangladesh Rural Advancement Committee and ASA in Bangladesh have already demonstrated
that very poor clients can be reached profitably: both institutions had profits of more than 4% of
assets in 2000.
There are cases where microfinance cannot be made profitable, for example, where potential clients
are extremely poor and risk-averse or live in remote areas with very low population density. In such
settings, microfinance may require continuing subsidies. Whether microfinance is the best use of
these subsidies will depend on evidence about its impact on the lives of these clients."
(http://www.cgap.org/about/faq)
back to top
IV. Microfinance impact and outcomes
Evidence that microfinance works
"Gun Keshari has become a regular borrower

of [an MFI] and over time, with the support of
small, low-interest loans, Gun Keshari has
seen a dramatic improvement in the living
standards of her family." - Polly Banks Kiva
Page 113 of 117
Fellow, Nepal
According to CGAP, "Comprehensive impact studies have demonstrated that: Microfinance helps
very poor households meet basic needs and protect against risks; The use of financial services by
low-income households is associated with improvements in household economic welfare and
enterprise stability or growth; By supporting women's economic participation, microfinance helps to
empower women, thus promoting gender-equity and improving household well-being; For almost all
significant impacts, the magnitude of impact is positively related to the length of time that clients
have been in the program." (UNCDF Microfinance)
Poor people, with access to savings, credit, insurance, and other financial services, are more
resilient and better able to cope with the everyday crises they face. Even the most rigorous
econometric studies have proven that microfinance can smooth consumption levels and significantly
reduce the need to sell assets to meet basic needs. With access to microinsurance, poor people can
cope with sudden increased expenses associated with death, serious illness, and loss of assets.
Access to credit allows poor people to take advantage of economic opportunities. While increased
earnings are by no means automatic, clients have overwhelmingly demonstrated that reliable
sources of credit provide a fundamental basis for planning and expanding business activities. Many
studies show that clients who join and stay in programs have better economic conditions than non-
clients, suggesting that programs contribute to these improvements. A few studies have also shown
that over a long period of time many clients do actually graduate out of poverty.
By reducing vulnerability and increasing earnings and savings, financial services allow poor
households to make the transformation from "every-day survival" to "planning for the future."
Households are able to send more children to school for longer periods and to make greater
investments in their children's education. Increased earnings from financial services lead to better
nutrition and better living conditions, which translates into a lower incidence of illness. Increased
earnings also mean that clients may seek out and pay for health care services when needed, rather
than go without or wait until their health seriously deteriorates. (http://www.cgap.org/about/faq)
Empirical evidence shows that, among the poor, those participating in microfinance programs who
had access to financial services were able to improve their well-being-both at the individual and
household level-much more than those who did not have access to financial services.
In Bangladesh, Bangladesh Rural Advancement Committee (BRAC) clients increased household

expenditures by 28% and assets by 112%. The incomes of Grameen members were 43% higher
than incomes in non-program villages.
Page 114 of 117
In El Salvador, the weekly income of FINCA clients increased on average by 145%.
In India, half of SHARE clients graduated out of poverty.
In Ghana, 80% of clients of Freedom from Hunger had secondary income sources, compared to
50% for non-clients.
In Lombok, Indonesia, the average income of Bank Rakyat Indonesia (BRI) borrowers increased by
112%, and 90% of households graduated out of poverty.
In Vietnam, Save the Children clients reduced food deficits from three months to one month."
(http://cgap.org)
Microcredit may be inappropriate where conditions pose severe challenges to loan repayment. For
example, populations that are geographically dispersed or have a high incidence of disease may not
be suitable microfinance clients. In these cases, grants, infrastructure improvements or education
and training programs are more effective. For microcredit to be appropriate, the clients must have
the capacity to repay the loan under the terms by which it is provided. (http://yearofmicrocredit.org)
Microfinance: a good tool for empowering women
"Today I'm a very respected woman in the

community. I have come out of the crowd
of women who are looked down upon. Due
to the loan that I received... you have
made me to be a champion out of
nobody." - Rose Athieno, Produce Reseller,
Uganda
Microfinance programs have generally targeted poor women. By providing access to financial
services only through women-making women responsible for loans, ensuring repayment through
Page 115 of 117
women, maintaining savings accounts for women, providing insurance coverage through women-
microfinance programs send a strong message to households as well as to communities.
Many qualitative and quantitative studies have documented how access to financial services has
improved the status of women within the family and the community. Women have become more
assertive and confident. In regions where women's mobility is strictly regulated, women have
become more visible and are better able to negotiate the public sphere. Women own assets,
including land and housing, and play a stronger role in decision making.
In some programs that have been active over many years, there are even reports of declining levels
of violence against women. (http://www.cgap.org/about/faq)
Microfinance is not a silver bullet

Microfinance is but one strategy battling an immense problem.
In the last two decades, substantial progress has been made in developing techniques to deliver
financial services to the poor on a sustainable basis. Most donor interventions have concentrated on
one of these services, microcredit. For microcredit to be appropriate however, the clients must have
the capacity to repay the loan under the terms by which it is provided. Otherwise, clients may not be
able to benefit from credit and risk being pushed into debt problems. This sounds obvious, but
microcredit is viewed by some as "one size fits all." Instead, microcredit should be carefully
evaluated against the alternatives when choosing the most appropriate intervention tool for a specific
situation.
Microcredit may be inappropriate where

conditions pose severe challenges to standard microcredit methodologies. Populations that are
geographically dispersed or nomadic may not be suitable microfinance candidates. Microfinance
may not be appropriate for populations with a high incidence of debilitating illnesses (e.g.,
Page 116 of 117
HIV/AIDS). Dependence on a single economic activity or single agricultural crop, or reliance on

barter rather than cash transactions may pose problems. The presence of hyperinflation, or absence
of law and order may stress the ability of microfinance to operate. Microcredit is also much more
difficult when laws and regulations create significant barriers to the sustainability of microfinance
providers (for example, by mandating interest-rate caps). (http://www.cgap.org/about/faq)
While microfinance can not reach all economic segments of society, it has been shown to reach
segments previously un-serviced by other financial markets.
Examples of some alternative strategies

Grants can be used to help overcome the social isolation, lack of productive skills, and low self-
confidence of the extreme poor, and to prepare them for eventual use of microcredit. Small grants
and other financial entitlements can work well as first steps to "graduate" the poor from vulnerability
to economic self-sufficiency. A successful example is the BRAC Income Generation for Vulnerable
Groups Development program in Bangladesh. This program has graduated more than 660,000
destitute women through free food, training, health care, and savings to BRAC's mainstream
microcredit program.
Investments in infrastructure, such as roads, communications, and education, provide a foundation

for economic activities. Community-level investments in commercial or productive infrastructure
(such as market centers or small-scale irrigation schemes) also facilitate business activity.
Employment programs prepare the poor for self-employment. Food-for-work programs and public
works projects fit this model. In many cases, these programs may be out of reach for cash-strapped
local governments but within the purview of donors.
Non-financial services range from literacy classes and community development to market-based
business-development services. While non-financial services should be provided by separate
institutional providers, there are clear, complementary links with the demand for and impact of
microcredit. For example, improved access to market opportunities stimulates - and depends on -
securing credit to cover the costs (product design, transport, etc.) of taking advantage of those
opportunities.
Legal and institutional reforms can create incentives for microfinance by improving the operating
environment for both microfinance providers and their clients. For example, streamlining micro-
enterprise registration, abolishing caps on interest rates, loosening regulations governing non-
mortgage collateral, strengthening the judicial system, and reducing the cost and time of property
and asset registration can foster a supportive climate for microfinance. (http://cgap.org)
Page 117 of 117

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Page 1 of 117

Notes for CHG 860

Advanced Entrepreneurship – Full Text

Advanced Entrepreneurship – Full Text ........................................................................................................ 1

Table of Contents .......................................................................................................................................... 2

What is an Entrepreneur? ........................................................................................................................... 12

What is Entrepreneurship? ......................................................................................................................... 12

What is Intra-preneurship? ......................................................................................................................... 12

What is Micro-preneurship? ....................................................................................................................... 12

What is a Business? ..................................................................................................................................... 13

What is a Small Business? ........................................................................................................................... 13

Entrepreneur versus Small Business ........................................................................................................... 13

Small Business owner to a Successful Entrepreneurship............................................................................ 14

The Meaning ........................................................................................................................................... 14

Small Business owner to a Successful Entrepreneurship........................................................................ 15

Concluding the discussion....................................................................................................................... 15

Types of Entrepreneur ................................................................................................................................ 16

Social entrepreneur ................................................................................................................................ 16

Serial entrepreneur ................................................................................................................................. 16

Lifestyle entrepreneur ............................................................................................................................ 16

Cooperative entrepreneur ...................................................................................................................... 17

Theory-based Typologies ........................................................................................................................ 17

Levels of Entrepreneurial Development ..................................................................................................... 17

Level One: The Self-Employed Mindset .................................................................................................. 17

Level Two: The Managerial Perspective ................................................................................................. 18

Level Three: The Attitude of Owner/Leader ........................................................................................... 19

Level Four: The Entrepreneurial Investor ............................................................................................... 19

Level Five: The True Entrepreneur .......................................................................................................... 20

Twelve Characteristics of Entrepreneur ..................................................................................................... 20

#1) Confident .......................................................................................................................................... 21

#2) Feels a Sense of Ownership .............................................................................................................. 21

#3) Able to Communicate ....................................................................................................................... 21

#4) Passionate about Learning ................................................................................................................ 21

#5) Team Player ...................................................................................................................................... 22

#6) System-Oriented ............................................................................................................................... 22

#7) Dedicated .......................................................................................................................................... 22

#8) Grateful ............................................................................................................................................. 22

#9) Optimistic .......................................................................................................................................... 23

#11) A Leader by Example....................................................................................................................... 23

#12) Not Afraid of Risk or Success .......................................................................................................... 23

Types of Entrepreneurships ........................................................................................................................ 23

Small Business Entrepreneurship............................................................................................................ 24

Scalable Startup Entrepreneurship ......................................................................................................... 24

Large Company Entrepreneurship .......................................................................................................... 24

Social Entrepreneurship .......................................................................................................................... 24

Entrepreneurship versus Intrapreneurship ................................................................................................ 24

Entrepreneurship and intrapreneurship: advantages and disadvantages ................................................. 25

Entrepreneurship and intrapreneurship: similarities and differences .......................................................... 26

Types of Business ........................................................................................................................................ 27

Sole proprietorship ................................................................................................................................. 27

What is a Sole Proprietorship? ........................................................................................................... 27

Advantages and Disadvantages of a sole proprietorship ................................................................... 27

Public Limited Company ......................................................................................................................... 28

Non-Governmental Organization (NGO) ................................................................................................ 28

Limited Company (LTD) ........................................................................................................................... 29

Limited Liability Company (LLC) .............................................................................................................. 29

Private Company Limited by Guarantee ................................................................................................. 29