Building an Efficient New Venture Team: Key Elements and Strategies

1. Organizational Feasibility Analysis Day #3 Chapter 9: Building a New Venture Team Entrepreneurship: Successfully Launching New Ventures Modified from Barringer and Ireland (2008)

2. Why is a New Venture Team Important? • Fundamental Problem for New Firms: Liabilities of Newness • The basic concept: • New ventures have a high likelihood of failing because the people who start the firm can’t adjust quickly enough to their new roles and because the firm lacks a “track record” with those in external environment • One way to overcome liabilities of newness is via a talented and experienced new venture team • They have a track record (e.g., via their experience) • They can provide legitimacy for external others • Research shows that the composition of the team is an important success factor of new ventures • Multiple individuals simultaneously identify the same opportunity • Success often depends on the abilities of the initial founders and their group of helpers

3. What is a New Venture Team? • Group of founders • Management team • Key employees • Boards of directors • Boards of advisers • Lenders and Investors • VCs (institutionalized, angels) and Bankers • Others (e.g., accountants, attorneys, etc.)

4. Element 1: Founder(s) of the Firm • The individual(s) who initiate and have equity stakes in the venture • Important factors about founder(s): • Founder characteristics & early decisions impact new venture team development • Higher education • Prior entrepreneurial experience • Relevant industry experience • The ability to “network” effectively • Should you found a Solo- or Team-based Venture? • 50% to 70% of all new ventures started by more than one person • Research suggests new ventures started by a team have an advantage (especially growth oriented) • More talent, more ideas, psychological support, faster firm growth, better network quality • Teams more successful if 1) have previously worked together & 2) are heterogeneous • 2 potential problems with teams • Members may not get along • As firm grows, if need to establish a formal structure with a hierarchy, may cause problems

5. Element 2: Recruiting Key Employees • New venture operations are usually very lean • For most and especially high growth ventures, there is a “breaking point” where to remain competitive and prosperous, employees must be hired • When and why should you hire employees? ...it depends • Startups vary in how quickly they need to add personnel • Decisions are based on necessity, financial abilities, knowledge specialization, time issues, hierarchy level needed, etc. • Requires new venture founder(s) to evaluate their skills for shortcomings • High growth firms: usually based on need and knowledge specialization • eBay needed a CEO, Starbucks needed an operations manager • Salary Substitutes and lifestyles: primary determinant time issues, necessity, and financial abilities • How to you identify appropriate hires? ...depends on type of personnel needed • Networks almost always appropriate for any type of position and venture type • Executive search firms appropriate for high-growth ventures seeking top management team members • Placement offices (e.g., colleges)—good for a variety of positions and firms

6. Element 3: Board of Directors (BODs) • What is a BOD? • Panel of individuals elected by a corporation’s shareholders to oversee the management of the firm • Why have a BOD? • Legally, if new venture is a corporation, it is required to have a BOD • Can gain legitimacy and reduce liabilities of newness if the BOD consists of well-known and respected people • Most useful role is to provide guidance and support the firm’s managers • Sambazon, Inc. increased legitimacy and benefited from guidance from the founder of Silk Soymilk • Who in on a BOD? ...it depends • Typically made up of insiders and outsiders • An inside director is a person who is also an officer of the firm • An outside director is someone who is not employed by the firm • Often prior corporate officers • Corporate officers from other firms (which can sometimes become an interlock) • Research suggests certain mixes of BODs is important for different types of venture development • BOD composition has become a “hot topic” due to recent corporation scandals

7. Element 3: Board of Directors (BODs) • Guidelines for Forming Effective BODs • Aim high: experience and reputation matter • Composition: diversity, experience, inside/outside matters • Establish ground rules pertaining to decisions • Share information: keep updated and “in the loop” • Use committees: use standing committees • Motivate board members: compensation and opportunities are motivators • Address liabilities issues: disclose liabilities to members

8. Element 3: BODs (continued) • What do BODs Do? • BODs have three formal and fiduciary responsibilities • Appoint the officers of the firm • Declare dividends • Oversee the affairs of the corporation • Sarbanes-Oxley Act of 2002, or SOX, was established and increases the legal responsibility of a company’s board • Provisions include that a firm cannot make a loan to a board member and that the SEC has “oversight and enforcement authority of the Board” • Why do people serve on BODs? • Create interlocks • Obtain knowledge resources and create resource exchange relationships • Stay “tapped” into the industry • Desire to contribute to the development of a firm or cause • Small start ups will usually start by asking friends and family to be their first board • When do they meet and how are they paid? • How frequently? • Most BODs meet 3-4 times a year • Depends on the standards set in the articles of incorporation and the formal firm procedures • How are they compensated? • BODs are mostly compensated in company stock or serve voluntarily • Paying a cash honorarium is not thought to be effective

9. Element 4: Board of Advisors (BOAs) • What is a BOA? • Panel of experts who provide counsel and advice on an ongoing basis • Informal group with no legal responsibility for the firm and their advice is nonbinding • Easier to recruit due to fewer time requirements and no legal liability • Often geographically dispersed and meet online or via telephones • Why have a BOA? • For general guidance purposes or to address a specific issues • Lends credibility/legitimacy • Guidelines to Consider when Organizing a BOA • Make sure they play a meaningful role in the firm’s development and growth • Look for members who are compatible and complementary (heterogeneous) in terms of experience • When inviting people to be on BOA, be sure to carefully spell out the “rules” • What their role is • How to handle access to confidential information

10. Element 5: Lenders & Investors • Lenders (e.g., banks) provide debt financing • Can be useful for finding customers, providing support, etc. • The benefits of different types of banks for small businesses and start-ups is becoming a “hot topic” • Investors provide equity financing (e.g., they acquire equity stake in venture) • Two main types of investors: • 1) institutionalized venture capitalists and 2) angel investors • How do investors add value to a new venture (see Table 9.3 for more)? • With a vested interest in the companies they finance, causes them to become involved • They provide guidance & lending advice • Assume the natural role of providing financial oversight • Very helpful for recruiting customers • Important Considerations with Lenders & Investors • Their goals are sometimes not inline with entrepreneurs’ • They often want a liquidity event • Often require substantial controlling power and profit percentages

11. Element 6: Other Professional Advisors • There are hosts of other professionals that can make up a firm’s new venture team • Attorneys for legal issues • Accountants for financial issues • Business consultants • Business Consultants • An individual who gives professional or expert advice. • Business consultants fall into two categories: • Paid consultants • Consultants available for free or at a reduced rate via nonprofit or governmental agency • Small Business Administration (SBA) at national and local levels • National SBA: www.sba.gov • Columbus SBA: http://www.sba.gov/oh/columbus/index.html • Small Business Development Centers (SBDC) • At UD: http://www.emtec.org/SBDC/Univ_of_Day_SBDC.htm • At Wright State U: http://www.sbdcwsu.org/ • In Springfield: http://www.smbusdev.org/ • Business Incubators • University Entrepreneurship Centers

12. Organizational Feasibility Analysis: New Venture Team Assignment Requirements • Describe the founding Management Team (e.g., the people in your group) • Describe the qualifications of each member of the team as well as if and how your team is uniquely qualified to make this business a success. • Discuss if your qualifications are lacking, what must you do to improve your abilities? • If you are not qualified and cannot acquire the necessary skills within the team, how will you handle these shortcomings? • Describe any Anticipated Future Human Resource Needs • As your firm grows, you will likely need to hire on additional employees. • Describe 2-3 additional people that should be added to the venture’s employee roster (not the name of a person –the profile of the type of person you’d want). • Describe the unique contribution each of these individuals could bring to the team. • Include the appendices of your deliverables, a copy of each team member’s current resume.