6.

1 The Challenge of New Venture Start-ups (ANGELA CANTORIA)

7 Components of New Venture Motivation:

1. The need for approval

2. The need for independence
3. The need for personal development
4. Welfare (philanthropic) considerations
5. Perception of wealth
6. Tax reduction and indirect benefits
7. Following role models

6.2 PITFALLS IN SELECTING NEW VENTURE (JANE ELLAINE DALIDA)

“ Pitfalls in business refer to likely mistakes or problems in situation.”

1. Lack of Objective Evaluation

- Many entrepreneurs lack of objectivity. Engineers and technically trained people are particularly prone to
falling in love with an idea for product services. They seem unaware of the need for the scrutiny they would
give to a design or project in the ordinary course of their professional work. The way to avoid this pitfall is
to subject all ideas rigorous study and investigation.

2. No Real Insight into the Market

- Many entrepreneurs do not realize the importance of developing a marketing approach in laying the
foundation for a new venture. They show a managerial shortsightedness. Also they do not understand the life
cycle that must be considered when introducing new product or service.

3. Inadequate Understanding of Technical Requirements

- The development of new product often involves new techniques. Failure to anticipate the technical
difficulties related to developing new product can sink a new venture.

4. Poor Financial Understanding

- A common difficulty with the development of a new product is an overly optimistic estimate of the funds
required to carry the project to completion. Sometimes entrepreneurs are ignorant of cost or a victim of
inadequate research and planning. Quiet often they tend to underestimate development cost by wide margins.
It is not unusual for estimates to be less than half of what is eventually required.
5. Lack of Venture Uniqueness
- A new venture must be unique. Uniqueness refers to the special characteristic an design concepts that draw
the customer, which should provide performance or service that is superior to that of competitive offering.

6. Ignorance of Legal Issues

- Business is subject to many legal requirements. One is the need to make the workplace safe for employees.
Second is to provide reliable and safe products and services. A third is the necessity for patents, trademarks
and copyrights to protect one’s inventions and products when these legal are overlooked major problems
can result.

6.3 CRITICAL FACTORS FOR NEW-VENTURE DEVELOPMENT (PAULINE POJARAS)

 A new venture goes through three (3) specific phases;

 Prestart-up Phase
- This phase begins with an idea for the venture and ends when the doors are opened for business.
 Start-up Phase
- This phase commences with the initiation of sales activity and the delivery of products and services,
and ends when the business is firmly established and beyond short-term threats to survival.
 Poststart-up Phase
-This phase lasts until the venture is terminated or the surviving organizational entity is no longer
controlled by an entrepreneur.

 Prestart-up and start-up phase are considered as the critical segments for entrepreneurs. During these
two phases, five factors are critical.
6.3a UNIQUENESS
-A new venture’s range of uniqueness can be considerable, extending from fairly routine to highly
non-routine. What separates the routine from the non-routine venture is the amount of innovation required
during prestart-up. This distinction is based on the need for new process technology to produce services or
products and on the need to service new market segments. Venture uniqueness is further characterized by
the length of time a non-routine venture will remain non-routine.
6.3b INVESTMENT
-To start a new venture, some industries requires less than $100,000 in investment, whereas in other
industries millions of dollars are necessary. Another finance-related critical issue is the extent and timing of
funds needed to move through the venture process.
6.3c GROWTH OF SALES
-This is another critical factor in start-up phase. In this factor, there are three classifications that most
ventures fit.
 Lifestyle ventures appear to have independence, autonomy, and control as their primary driving
forces. Neither large sales nor profits are deemed important beyond providing a sufficient and comfortable
living for the entrepreneur.
 In small profitable ventures, financial considerations play a major role. Autonomy and control also
are important in the sense that the entrepreneur does not want venture sales (and employment) to become
so large that he or she must relinquish equity or an ownership position and thus give up control over cash
flow and profits---which, it is hoped, will be substantial.
 In high-growth ventures, significant sales and profit growth are expected to the extent that it may be
possible to attract venture capital money and funds raised through public or private placements.
6.3d PRODUCT AVAILABILITY
-Essential to the success of any venture is product availability, the availability of a salable good or
service at the time the venture opens its doors. Some ventures have problems about their products because
some are still in development and some are released in the venture but there are lot of problems seen in the
product. Lack of product availability in finished form can affect the company’s image and its bottom line.
6.3e CUSTOMER AVAILABILITY
-Same with the product availability, customer availability is also a factor in a new venture. Venture risk
is affected by customer availability for start-up. At one end of the risk continuum is the situation where
customers are willing to pay cash for products or services before delivery. At the other of continuum is the
enterprise that gets started without knowing exactly who will buy its product. A critical consideration is how
long it will take to determine who the customers are, as well as their buying habits.
-One researcher noted, “The decision to ignore the market is an extremely risky one. There are, after
all, two fundamental criteria for entrepreneurial success. The first is having a customer who is willing to pay
you a profitable price for a product or a service. The second is that you must actually produce and deliver
the product or service. The farther a venture removes itself from certainty about these two rules, the greater
the risk and the greater the time required to offset this risk as the venture moves through the prestart-up and
start-up periods.
TABLE 6.1 A NEW-VENTURE IDEA CHECKLIST
6.4 Why New Venture Fails (ANGELA CANTORIA)

3 Major Categories of causes for failure

1. Product/Market Problems
2. Financial Difficulties
3. Managerial Problem

PRODUCT/MARKET PROBLEMS involved ff factors:

• Poor Timing
• Product Design Problems
• Inappropriate Distribution Strategy
• Unclear Business Definition
• Over reliance on one customer

FINANCIAL DIFFICULTIES involved ff factors:

• Initial Under capitalization
• Assuming debt too early
• Venture Capital Relationship Problem

MANAGERIAL PROBLEM involved ff factors:

• Concept of a team approach
• Human Resource Problem

A fourth "failure" or problem study dealt with a propose failure prediction model based on financial data
from newly founded ventures. Specific applications of the model included the following:

• Role of profitability and cash flow - the entrepreneur and manager should ensure that the products are
able to yield positive profitability and cash flows in the first years.\

• Role of debt - The entrepreneur and manager should ensure that enough stockholders capital is in the
initial balance sheet to buffer future losses.

• Combination of both - the entrepreneur and manager should not start a business if the share of
stockholders capital in the initial balance sheet is low and if negative cash flows in the first year are probable.

• Role of initial size - the entrepreneur and manager should understand that the more probable the negative
cash flows and the larger the debt share in the initial balance sheet, the smaller and initial size of the
business should be

• Role of velocity of capital - the entrepreneur and manager should not budget for fast velocity of capital in
the initial years if the risk of negative cash flows is high. More sales in comparison to capital results in more
negative cash flows and poorer profitability.

•Role of control - the entrepreneur and manager should monitor financial ratios from the first year,
especially the cash flow to total debt ratio. Risky combinations of ratios especially negative cash flows, a
low stockholders capital to total capital ratio and a high velocity of capital should be monitored and
compared with industrial standards.
6.5 THE TRADITIONAL VENTURE EVALUATION PROCESSES (JANE ELLAINE DALIDA)

1. Profile Analysis Approach

- A profile analysis is a tool that enables entrepreneurs to judge a business venture's potential by sizing up
the venture's strengths and weaknesses along a number of key dimensions or variables. A single strategic
variable seldom shapes the ultimate success or failure of a new venture. In most situations, a combination of
variables influences the outcome. It is important, therefore, to identify and investigate these variables before
committing resources to launch a new venture
.
2. Feasibility Criteria Approach
- Another evaluation method, the feasibility criteria approach, is a criteria selection list, based on the
following questions, from which entrepreneurs can gain insights into the viability of their venture.

Assessing the viability of a venture:

- Is it proprietary?
- Are initial production costs realistic?
- Are the initial marketing costs realistic?
- Does the product have potential for very high margins?
- Is the time required to get to market and to reach the break-even point realistic?
- Is the potential market large?
- Is the product the first of a growing family?
- Does an initial customer exist?
- Are the development costs and calendar times realistic?
- Is this a growing industry?
- Can the product and the need for it be understood by the financial community?

3. Comprehensive Feasibility Approach

- A more comprehensive and systematic feasibility analysis, a comprehensive feasibility approach,
incorporates external factors in addition to those included in the criteria questions cited below.
TECHNICAL FEASIBILITY

The evaluation of a new-venture idea should start with identifying the technical requirements- the technical
feasibility for producing a product or service that will satisfy the expectations of potential customers.

• Functional design of the product and attractiveness in appearance

• Flexibility, permitting ready modification of the external features of the product to meet customer demands
or technological and competitive changes.
• Durability of the materials from which the product is made
• Reliability, ensuring performance as expected under normal operating conditions
• Product safety, posing no potential dangers under normal operating conditions
• Reasonable utility, an acceptable rate of obsolescence
• Ease and low cost of maintenance
• Standardization through elimination of unnecessary variety among potentially inter- changeable parts
• Ease of processing or manufacture
• Ease in handling and use.

MARKETABILITY

Assembling and analyzing relevant information about the marketability of a new venture are vital for
judging its potential success. Three major areas in this type of analysis are (1) investigating the full market
potential and identifying customers (or users) for the goods or services. (2) analyzing the extent to which
the enterprise might exploit this potential market, and (3) using market analysis to determine the
opportunities and risks associated with the venture. To address these areas, a variety of informational
sources must be found and used.

• General Economic Trend.

• Market Data
• Pricing Data
• Competitive Data

6.6 THE CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION (PAULINE

POJARAS)
 Since newer movements taking shape in the ever changing entrepreneurial world, the following are
some of the contemporary methodologies being utilized for concept assessment and new venture
evaluation.

6.6a THE DESIGN METHODOLOGY

-Design is now a hot topic in the business world. The demand is becoming so great that universities are
now building programs that take a general approach to design rather than concentrating it in just technical
schools like schools like architecture and engineering. This methodology can be a vital source of assessment
for entrepreneurs and their early stage venture concepts.

DESIGN AND LEARN

-Design is a learning process that shapes and converts ideas into form, whether that is a plan of
action, an experience, or a physical thing. Designers often begin the search for viable solutions through the
iterative process of learning the language, issues, critical success factors, and constraints inherent in the
domains of interest. Mistakes and failures along the way are to be seen as opportunities to learn and adapt.
As a result, knowledge of and credibility within the venture’s domain are increased. Here are some examples
according to researchers;
 Learning from qualitative research
 Learning from prototyping
 Learning from feedback
 DESIGN DEVELOPMENT
-The design development utilizes skills we all possess but are generally ignored due to more
conventional problem solving practices. Design methodology takes an initial concept idea and develops a
proof of concept that elicits feedback from relevant stakeholders. The design method converts ideas into
form by integrating what is desirable from a user’s POV with what is technically and economically viable.
 Proof of Concept Feasibilty
 Proof of Concept Desirability
 Proof of Concept Viability

6.6b DESIGN-CENTERED ENTREPRENEURSHIP

-Researchers Michael G. Goldsby, Donald F. Kuratko, Matthew R. Marvel, and Thomas Nelson
have proposed the concept of design-centered entrepreneurship, introducing a model consisting of four
action stages: Ideation, Prototyping, Market Engagement, and Business Model. Each stage utilizes design
methods to develop a feasible, desirable, and viable venture concept. The process involves microiterations
within each stage to enhance outcomes and macroiterations, moving between stages for further development.
Overall, integrating design methodology aids in creating a distinctive proof of concept, facilitating the
development of entrepreneurial ideas.

6.6c THE LEAN START-UP METHODOLOGY

-The Lean Start-Up methodology is a scientific approach to creating early venture concepts and
delivering products to customers more quickly. It is based on the Japanese concept of lean manufacturing,
which aims to increase value and eliminate wasteful practices. This methodology treats every new venture as
an experiment that seeks to answer important questions about its viability and sustainability. Developed by
Eric Ries in 2011, the Lean Start-Up methodology helps prevent waste in start-ups and encourages
entrepreneurs to continually validate or discard assumptions. By minimizing the time and effort invested in
incorrect hypotheses, this approach emphasizes working smarter rather than harder. Steve Blank and Jerry
Engel have also contributed to the Lean Start-Up movement by creating the Lean Launchpad course for
educators. Key aspects of the Lean Start-Up methodology include being hypothesis-driven and actively
seeking and incorporating customer feedback early on. While it is not possible to condense the entire book
and methodology, these points provide a basic understanding of its principles.

KEY LEAN START-UP KEY TEMINOLOGY

-Minimum Viable Product (MVP)
-The Three A’s of Metrics
-Actionable
-Accessible
-Auditable
-Pivot
-Build-Measure-Learn Feedback Loop
-Validated Learning