[Solution] Challenges Unique to Start-ups and New Ventures
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Author: Sarah Bennett
Entrepreneurs need to consider the same issues of organization design and management control as managers of established businesses. They also need to decide how to enter their target market, where to find funding, and when and how to get expert advice.
Starting the Business: Buy or Make?
There are two basic ways in which an entrepreneur can enter into business:
- Buy an existing business. This is the lower-risk approach, because the entrepreneur can choose a business that already has a track record of success as well as a customer base, vendor relationships, or whatever else the business needs.
-
Start a new business. This is the riskier approach, but it gives the entrepreneur the most latitude to shape the business to their exact specifications. To be successful, the founder must usually launch a product or service that people will pay for and cannot already buy. The entrepreneur must be able to answer the following questions:
- Who are my customers?
- Where are they?
- At what price will they buy my product?
- In what quantities will they buy?
- Who are my competitors?
- How will my product differ from those of my competitors?
Some of the best ways to acquire this information are to work in the industry, research competitors, and read content designed for founders of start-ups.
Market Entry Approaches Comparison
| Approach | Risk Level | Control Level | Initial Investment | Speed to Market |
|---|---|---|---|---|
| Buy Existing Business | Lower | Medium | Higher | Fast |
| Start New Business | Higher | High | Varies | Slow |
| Buy Franchise | Medium | Low | Higher | Fast |
Financing the Business
Entrepreneurs can access various funding sources, each with different advantages and requirements:
- Personal savings - Many entrepreneurs initially fund their business with their own money
- Friends and family - Close contacts who believe in the entrepreneur's vision
- Angel investors - Wealthy individuals who provide capital in exchange for ownership equity
- Venture capital - Professional investment firms that fund high-growth potential businesses
- Small Business Administration (SBA) loans - Government-backed loans with favorable terms
- Small Business Investment Companies (SBICs) - Federally licensed entities that lend to new ventures
- Crowdfunding - Raising small amounts of money from many people via online platforms
Getting Business Advice
Successful entrepreneurs seek advice and guidance from multiple sources:
- Mentors - Experienced business people who provide guidance and wisdom
- Advisory boards - Groups of experts who provide non-binding strategic advice
- Professional services - Attorneys, accountants, and consultants
- Networking groups - Industry associations and entrepreneur organizations
- Small Business Development Centers (SBDCs) - Provide free consulting and low-cost training
- SCORE - A nonprofit association offering free business mentoring
Franchising
Franchising offers a middle path between buying an existing independent business and starting from scratch:
- Advantages: Established brand, proven business model, training and support, marketing assistance
- Disadvantages: High initial fees, ongoing royalties, limited control, dependence on franchiser's success
Select the phrases that best complete the following sentences.
A more risky approach to entering a market is to .
View Explanation
Starting a new business from scratch is riskier than buying a business that is already successful. The entrepreneur must figure out everything about the business strategy and how to implement it. However, this approach allows the entrepreneur to enter a market that does not yet exist.
A small-business investment company (SBIC) is .
View Explanation
An SBIC finances start-ups by lending money that it gets from the SBA.
A group of investors seeking high-growth opportunities is a venture capital company. Strategic alliances are formed between two companies that can mutually benefit by helping each other. A website that facilitates connections between entrepreneurs and investors is a crowdfunding site.
Select the correct response for the following question.
An entrepreneur wants to join an association that helps like-minded businesspeople meet each other and form relationships. What is the term for this kind of activity?
- Financing
- Consulting
- Networking
View Explanation
Meeting others with common interests to form informal, mutually beneficial relationships is called networking. Networking can be a good way to get to know people who may be interested in investing in a start-up or being on its advisory board.
Select the correct responses to the following question.
Which of the following are disadvantages a franchisee may experience? Check all that apply.
- Limited managerial control
- Little guidance on how to run the franchise
- Business failure of the franchiser
- High cost of purchase
- Little support from the franchiser
View Explanation
Buying a franchise is often an expensive way to enter a market. When this approach works well, it is because the franchiser provides ample support. However, the franchiser may not live up to the expectations of the franchisee or may go out of business altogether. Another disadvantage of owning a franchise is that the entrepreneur must run the business according to strict guidelines spelled out by the franchiser; if anything, the entrepreneur receives too much guidance in running the business.
