CHAPTER 15
Franchising

What Is Franchising and How Does It Work?

Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchisees) in exchange for an initial franchise fee and an ongoing royalty.

What Is Franchising?

The word franchise comes from an old dialect of French and means “privilege” or “freedom.” Franchising has a long history.  In the Middle Ages kings and lords granted franchises to specific individuals or groups to hunt on their land or to conduct certain forms of commerce. In the 1840s, breweries in Germany granted franchises to certain taverns to be the exclusive distributors of their beer for the region. Shortly after the U.S. Civil War, the Singer Sewing Machine Company began granting distribution franchises for its sewing machines and pioneered the use of written franchise agreements. Many of the most familiar franchises in the United States, including Kentucky Fried Chicken (1952), McDonald’s (1955), Burger King (1955).

How Does Franchising Work?

There is nothing magical about franchising. It is a form of growth that allows a business to get its products or services to market through the efforts of business partners or “franchisees.” As described previously, a franchise is an agreement between a franchisor (the parent company, such as Uptown Cheapskate or Comfort Keepers) and a franchisee (an individual or firm that is willing to pay the franchisor a fee for the right to sell its product, service, and/or business method).

Establishing a Franchise System

Establishing a franchise system should be approached carefully and deliberately. An entrepreneur should also be aware that over the years a number of fraudulent franchise organizations have come and gone and left financially ruined franchisees in their wake. Because of this, franchising is fairly heavily regulated.

When to Franchise

Retail firms grow when two things happen: first, when the attractiveness of a firm’s products or services become well known, whether it is a new restaurant or a fitness center, and, second, when a firm has the financial capability to build the outlets needed to satisfy the demand for its products or services.

Steps to Franchising a Business

Let’s assume that as an entrepreneur you have decided to use franchising as a means of growing your venture. What steps should you take to develop a franchise system?

Advantages and Disadvantages of Establishing a Franchise System

There are two primary advantages to franchising. First, early in the life of an organization, capital is typically scarce, and rapid growth is needed to achieve brand recognition and economies of scale. Franchising helps a venture grow quickly because franchisees provide the majority of the capital. Second, a concept called agency theories argues that for organizations with multiple units (such as restaurant chains), it is more effective for the units to be run by franchisees than by managers who run company-owned stores. The primary disadvantage of franchising is that an organization allows others to profit from its trademark and business model.

Buying a Franchise

Now let’s look at franchising from the franchisee’s perspective. Purchasing a franchise is an important business decision involving a substantial financial commitment. Potential franchise owners should strive to be as well informed as possible before purchasing a franchise and should be well aware that it is often legally and financially difficult to exit a franchise relationship.

The Cost of a Franchise

The initial cost of a business format franchise varies, depending on the franchise fee, the capital needed to start the business, and the strength of the franchisor. When evaluating the cost of a franchise, prospective franchisees should consider all the costs involved. Franchisors are required by law to disclose all their costs in a document called the Franchise Disclosure Document and send it to the franchisee.

Advantages and Disadvantages of Buying a Franchise

There are two primary advantages to buying a franchise over other forms of business ownership. First, franchising provides an entrepreneur the opportunity to own a business using a tested and refined business model. Second, when an individual purchase a franchise, the franchisor typically provides training, technical expertise, and other forms of support.

Steps in Purchasing a Franchise

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CHAPTER 14
Strategies for Firm Growth

Internal Growth Strategies

Internal growth strategies involve efforts taken within the firm itself, such as new product development, other product-related strategies, and international expansion, for the purpose of increasing sales revenue and profitability.

New Product Development

New product development involves designing, producing, and selling new products (or services) as a means of increasing firm revenues and profitability. In many fast-paced industries, new product development is a competitive necessity.

Additional Internal Product-Growth Strategies

Along with developing new products, firms grow by improving existing products or services, increasing the market penetration of an existing product or service, or pursuing a product extension strategy.

Improving an Existing Product or Service

A business can often increase its revenue by improving an existing product or service enhancing quality, making it larger or smaller, making it more convenient to use, improving its durability, or making it more up-to-date. Improving an item means increasing its value and price potential from the customer’s perspective.

Increasing the Market Penetration of an Existing Product or Service

A market penetration strategy involves actions taken to increase the sales of a product or service through greater marketing efforts or through increased production capacity and efficiency. An increase in a product’s market share is typically accomplished by increasing advertising expenditures, offering sales promotions, lowering the price, increasing the size of the sales force, or increasing a company’s social media efforts.

Extending Product Lines

A product line extension strategies involves making additional versions of a product so that it will appeal to different clientele or making related products to sell to the same clientele. Firms also pursue product extension strategies as a way of leveraging their core competencies into related areas.

Geographic Expansion

Geographic expansion is another internal growth strategy. Many entrepreneurial businesses grow by simply expanding from their original location to additional geographic sites. This type of expansion is most common in retail settings.

International Expansion

International expansion is another common form of growth for entrepreneurial firms. International new venture are businesses that, from inception, seek to derive competitive advantage by using their resources to sell products or services in multiple countries.

Selling Overseas

Many entrepreneurial firms first start selling overseas by responding to an unsolicited inquiry from a foreign buyer. It is important to handle the inquiry appropriately and to observe protocols when trying to serve the needs of customers in foreign markets.

Foreign Market Entry Strategies

The majority of entrepreneurial firms first enter foreign markets as exporters, but firms also use licensing, joint ventures, franchising, turnkey projects, and wholly owned subsidiaries to start international expansion.

External Growth Strategies

External growth strategies rely on establishing relationships with third parties. Mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising are examples of external growth strategies. Each of these strategic options is discussed in the following sections.

Mergers and Acquisitions

Many entrepreneurial firms grow through mergers and acquisitions. A merger is the pooling of interests to combine two or more firms into one. An acquisition is the outright purchase of one firm by another. In an acquisition, the surviving firm is called the acquirer, and the firm that is acquired is called the target.

Licensing

Licensing is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions. Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party. Licensing also works well for firms that create novel products but do not have the resources to build manufacturing capabilities or distribution networks, which other firms may already have in place.

Strategic Alliances

A strategic alliance is a partnership between two or more firms that is developed to achieve a specific goal. Various studies show that participation in alliances can boost a firm’s rate of patenting, product innovation, and foreign sales. Alliances tend to be informal and do not involve the creation of a new entity (such as in a joint venture).

Joint Ventures

A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization. Gaining access to a foreign market is a common reason to form a joint venture. In these cases, the joint venture typically consists of the firm trying to reach a foreign market and one or more local partners.

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CHAPTER 13
Preparing for and Evaluating the Challenges of Growth

Preparing for Growth

Most entrepreneurial firms want to grow. Especially in the short term, growth in sales revenue is an important indicator of an entrepreneurial venture’s potential to survive today and be successful tomorrow. Growth is exciting and, for most businesses, is an indication of success. Many entrepreneurial firms have grown quickly, producing impressive results for their employees and owners as a result of doing so; consider Google, Dropbox, and Warby Parker, among others, as examples of this.

Appreciating the Nature of Business Growth

The first thing that a business can do to prepare for growth is to appreciate the nature of business growth. Growing a business successfully requires preparation, good management, and an appreciation of the issues involved. The following are issues about business growth that entrepreneurs should appreciate.

Not All Businesses Have the Potential to Be Aggressive Growth Firms

The businesses that have the potential to grow the fastest over a sustained period of time are ones that solve a significant problem or have a major impact on their customers’ productivity or lives. This is why the lists of fast-growing firms are often dominated by health care, technology, social media, and entertainment companies. These companies can potentially have the most significant impact on their customers’ businesses or lives.

A Business Can Grow Too Fast

Many businesses start fast and never let up, which stresses a business financially and can leave its owners emotionally drained. Sometimes businesses grow at a measured pace and then experience a sudden upswing in orders and have difficulty keeping up. This scenario can transform a business with satisfied customers and employees into a chaotic workplace with people scrambling to push the business’s product out the door as quickly as possible. 

Business Success Doesn’t Always Scale

Unfortunately, the very thing that makes a business successful might suffer as the result of growth. This is what business experts often mean when they say growth is a “two-edged sword.” For example, businesses that are based on providing high levels of individualized service often don’t grow or scale well. For example, an investment brokerage service that initially provided high levels of personalized attention can quickly evolve into providing standard or even substandard service as it adds customers and starts automating its services.

Staying Committed to a Core Strategy

The second thing that a business can do to prepare for growth is to stay committed to a core strategy. A firm’s core strategy is largely determined by its core competencies, or what it does particularly well. While this insight might seem self-evident, it’s important that a business not lose sight of its core strategy as it prepares for growth.

Planning for Growth

The third thing that a firm can do to prepare for growth is to establish growth-related plans. This task involves a firm thinking ahead and anticipating the type and amount of growth it wants to achieve. A business plan normally includes a detailed forecast of a firm’s first three to five years of sales, along with an operations plan that describes the resources the business will need to meet its projections.

Reasons for Growth

Although sustained, profitable growth is almost always the result of deliberate intentions and careful planning, firms cannot always choose their pace of growth. A firm’s pace of growth is the rate at which it is growing on an annual basis. Sometimes firms are forced into a high-growth mode sooner than they would like. This section examines the six primary reasons firms try to grow to increase their profitability and valuation

Managing Growth

Many businesses are caught off guard by the challenges involved with growing their companies. One would think that if a business got off to a good start, steadily increased its sales, and started making money, it would get progressively easier to manage the growth of a firm. In many instances, just the opposite happens. As a business increases its sales, its pace of activity quickens, its resource needs increase, and the founders often find that they’re busier than ever. Major challenges can also occur.

Knowing and Managing the Stages of Growth

The majority of businesses go through a discernable set of stages referred to as the organizational life cycle. The stages, pictured below, include introduction, early growth, continuous growth, maturity, and decline. Each stage must be managed differently. It’s important for an entrepreneur to be familiar with these stages, along with the unique opportunities and challenges that each stage entails.

Challenges of Growth

There is a consistent set of challenges that affect all stages of a firm’s growth. The challenges typically become more acute as a business grows, but a business’s founder or founders and managers also become more savvy and experienced with the passage of time. The challenges illustrate that no firm grows in a competitive vacuum. This section is divided into two parts. The first part focuses on the managerial capacity problem, which is a framework for thinking about the overall challenge of growing a firm. The second part focuses on the four most common day-to-day challenges of growing a business.

Managerial Capacity

As an administrative framework, the primary purpose of a firm is to package its resources together with resources acquired outside the firm as a foundation for being able to produce products and services at a profit. As a firm goes about its routine activities, the management team becomes better acquainted with the firm’s resources and its markets.

Day-to-Day Challenges of Growing a Firm

Along with the overarching challenges imposed by the managerial capacity problem, there are a number of day-to-day challenges involved with growing a firm. The following is a discussion of the four most common challenges.

Cash Flow Management

As a firm grows, it requires an increasing amount of cash to service its customers. In addition, a firm must carefully manage its cash on hand to make sure it maintains sufficient liquidity to meet its payroll and cover its other short-term obligations.

Price Stability

If firm growth comes at the expense of a competitor’s market share, price competition can set in. The best thing for a small firm to do is to avoid price competition by serving a different market and by serving that market particularly well.

Quality Control

One of the most difficult challenges that businesses encounter as they grow is maintaining high levels of quality and customer service. As a firm grows, it handles more service requests and paperwork and contends with an increasing number of prospects, customers, vendors, and other stakeholders. If a business can’t build its infrastructure fast enough to handle the increased activity, quality and customer service will usually suffer.

Capital Constraints

Although many businesses are started fairly inexpensively, the need for capital is typically the most prevalent in the early growth and continuous growth stages of the organizational life cycle. The amount of capital required varies widely among businesses. Some businesses, like restaurant chains, might need considerable capital to hire employees, construct buildings, and purchase equipment. If they can’t raise the capital they need, their growth will be stymied.

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CHAPTER 12
The Importance of Intellectual Property

The Importance of Intellectual Property

Intellectual property is any product of human intellect that is intangible but has value in the marketplace. It is called “intellectual” property because it is the product of human imagination, creativity, and inventiveness.

Determining What Intellectual Property to Legally Protect

There are two primary rules of thumb for deciding if intellectual property protection should be pursued for a particular intellectual asset. First, a firm should determine if the intellectual property in question is directly related to its competitive advantage. The second primary criterion for deciding if intellectual property protection should be pursued is to determine whether an item has value in the marketplace.

The Four Key Forms of Intellectual Property

Patents, trademarks, copyrights, and trade secrets are the four key forms of intellectual property. We discuss each form of intellectual property protection in the following sections.

Patents

A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent. The owner of the patent is granted a legal monopoly for a limited amount of time. However, a patent does not give its owner the right to make, use, or sell the invention; it gives the owner only the right to exclude others from doing so.

Trademarks

A trademark is any word, name, symbol, or device used to identify the source or origin of products or services and to distinguish those products or services from others. All businesses want to be recognized by their potential clientele and use their names, logos, and other distinguishing features to enhance their visibility. Trademarks also provide consumers with useful information.

Copyrights

A copyright is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work. The work must be in a tangible form, such as a book, operating manual, magazine article, musical score, computer software program, or architectural drawing. If something is not in a tangible form, such as a speech that has never been recorded or saved on a computer disk, copyright law does not protect it.

Trade Secrets

Most companies, including start-ups, have a wealth of information that is critical to their success but does not qualify for patent, trademark, or copyright protection. Some of this information is confidential and needs to be kept secret to help a firm maintain its competitive advantage. An example is a company’s customer list.

Conducting an Intellectual Property Audit

The first step a firm should take to protect its intellectual property is to complete an intellectual property audit. This is recommended for all firms, regardless of size, from start-ups to mature companies. An intellectual property audit is conducted to determine the intellectual property a company owns.

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CHAPTER 11
Unique Marketing Issues

Selecting a Market and Establishing a Position

To succeed, a new firm must know who its customers are and how to reach them. A firm uses a three-step process to determine who its customers are.

Branding

A brand is the set of attributes—positive or negative—that people associate with a company. These attributes can be positive, such as trustworthy, innovative, dependable, or easy to deal with. Or they can be negative, such as cheap, unreliable, arrogant, or difficult to deal with. The customer loyalty a company creates through its brand is one of its most valuable assets.

The 4Ps of Marketing for New Ventures

Once a company decides on its target market, establishes a position within that market, and establishes a brand, it is ready to begin planning the details of its marketing mix.  Most marketers organize their marketing mix into four categories: product, price, promotion, and place (or distribution). For an obvious reason, these categories are commonly referred to as the 4Ps.

Product

A firm’s product, in the context of its marketing mix, is the good or service it offers to its target market. Technically, a product is something that takes on physical form, such as an Apple iPhone, a bicycle, or a solar panel.

Price

Price is the amount of money consumers pay to buy a product. It is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is an extremely important element of the marketing mix because it ultimately determines how much money a company can earn.

Promotion

Promotion refers to the activities the firm takes to communicate the merits of its product to its target market. Ultimately, the goal of these activities is to persuade people to buy the product

Place (or Distribution)

Place, or distribution, encompasses all the activities that move a firm’s product from its place of origin to the consumer. A distribution channel is the route a product takes from the place it is made to the customer who is the end user.

Sales Process and Related Issues

A firm’s sales process depicts the steps it goes through to identify prospects and close sales. It doesn’t matter whether a firm is selling directly to customers or through intermediaries; it still has a process through which it makes sales. If it’s selling through an intermediary, like a distributor, it has to convince the distributor to carry its products and has to offer the distributor varying levels of support.

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CHAPTER 10
Getting Financing or Funding

The Importance of Getting Financing or Funding

The need to raise money surprises a number of entrepreneurs, in that many of them launch their firms with the intention of funding all their needs internally. Commonly, though, entrepreneurs discover that operating without investment capital or borrowed money is more difficult than they anticipated. Because of this, it is important for entrepreneurs to understand the role of investment capital in the survival and subsequent success of a new firm.

Why Most New Ventures Need Funding

There are three reasons that most entrepreneurial ventures need to raise money during their early life: cash flow challenges, capital investments, and lengthy product development cycles.

Sources of Personal Financing

Typically, the seed money that gets a company off the ground comes from the founders’ own pockets. There are three categories of sources of money in this area: personal funds, friends and family, and bootstrapping.

Preparing to Raise Debt or Equity Financing

Once a start-up’s financial needs exceed what personal funds, friends and family, and bootstrapping can provide, debt and equity are the two most common sources of funds. The most important thing an entrepreneur must do at this point is determine precisely what the company needs and the most appropriate source to use to obtain those funds. A carefully planned approach to raising money increases a firm’s chance of success and can save an entrepreneur considerable time.

Sources of Equity Funding

The primary disadvantage of equity funding is that the firm’s owners relinquish part of their ownership interest and may lose some control. The primary advantage is access to capital. In addition, because investors become partial owners of the firms in which they invest, they often try to help those firms by offering their expertise and assistance. Unlike a loan, the money received from an equity investor doesn’t have to be paid back. The investor receives a return on the investment through dividend payments and by selling the stock.

Business Angels

Business angels are individuals who invest their personal capital directly in start-ups. The prototypical business angel, who invests in entrepreneurial start-ups, is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and invests in companies that are in the region where he or she lives.

Venture Capital

Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. Venture capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms. The funds, or pools of money, are raised from high-net-worth individuals, pension plans, university endowments, foreign investors, and similar sources.

Initial Public Offering

Another source of equity funding is to sell stock to the public by staging an initial public offering (IPO). An IPO is the first sale of stock by a firm to the public. Any later public issuance of shares is referred to as a secondary market offering. When a company goes public, its stock is typically traded on one of the major stock exchanges.

Sources of Debt Financing

Debt financing involves getting a loan or selling corporate bonds. Because it is virtually impossible for a new venture to sell corporate bonds, we’ll focus on obtaining loans. There are two common types of loans. The first is a single-purpose loan, in which a specific amount of money is borrowed that must be repaid in a fixed amount of time with interest. The second is a line of credit, in which a borrowing “cap” is established and borrowers can use the credit at their discretion. Lines of credit require periodic interest payments.

Commercial Banks

Historically, commercial banks have not been viewed as practical sources of financing for start-up firms. This sentiment is not a knock against banks; it is just that banks are risk averse, and financing start-ups is risky business. There are two reasons that banks have historically been reluctant to lend money to start-ups. First, as mentioned previously, banks are risk averse. The second reason banks have historically been reluctant to lend money to start-ups is that lending to small firms is not as profitable as lending to large firms, which have been the staple clients of commercial banks.

SBA Guaranteed Loans

The loans are for small businesses that are unable to secure financing on reasonable terms through normal lending channels. The SBA does not currently have funding for direct loans, other than a program to fund direct loans for businesses in geographic areas that are hit by natural disasters. SBA guaranteed loans are utilized more heavily by existing small businesses than start-ups, they should not be dismissed as a possible source of funding.

Other Sources of Debt Financing

There are a variety of other avenues business owners can pursue to borrow money or obtain cash. Vendor credit (also known as trade credit) is when a vendor extends credit to a business in order to allow the business to buy its products and/or services up front but defer payment until later. Factoring is a financial transaction whereby a business sells its account receivable to a third party, called a factor, at a discount in exchange for cash. A common type of alternative lending is the merchant cash advance. In a merchant cash advance, the lender provides a business a lump sum of money in exchange for a share of future sales that covers the payment amount plus fees.

Creative Sources of Financing and Funding

Because financing and funding are difficult to obtain, particularly for start-ups, entrepreneurs often use creative ways to obtain financial resources. Even for firms that have financing or funding available, it is prudent to search for sources of capital that are less expensive than traditional ones.

Crowdfunding

A popular creative source of funding for new businesses is crowdfunding. Crowdfunding is the practice of funding a project or new venture by raising monetary contributions from a large number of people, typically via the Internet. There are two types of crowdfunding sites: rewards-based crowdfunding and equity-based crowdfunding. Reward-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward.  Equity-based crowdfunding helps businesses raise money by tapping individuals who provide funding in exchange for equity in the business.

Leasing

A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment. Leases for facilities and leases for equipment are the two most common types of leases that entrepreneurial ventures undertake.

Other Grant Programs

There are a limited number of other grant programs available to entrepreneurs. Obtaining a grant takes a little detective work. Granting agencies are, by nature, low-key, so they normally need to be sought out.

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CHAPTER 9
Building a New-Venture Team

Liability of Newness as a Challenge

As we note throughout this textbook, new ventures have a high propensity to fail. The high failure rate is due in part to what is known as the liability of newness, which refers to the fact that companies often falter because the people who start them aren’t able to adjust quickly enough to their new roles and because the firm lacks a “track record” with outside buyers and suppliers. Assembling a talented and experienced new-venture team is one path firms can take to overcome these limitations. Another way entrepreneurs overcome the liability of newness is by attending entrepreneurship-focused workshops and events.

Creating a New-Venture Team

Those who launch or found an entrepreneurial venture have an important role to play in shaping the firm’s business model. Stated even more directly, it is widely known that a well-conceived business plan, one that flows from the firm’s previously established business model, cannot get off the ground unless a firm has the leaders and personnel to carry it out.

The Founder or Founders

Founders’ characteristics and their early decisions significantly affect the way an entrepreneurial venture is received and the manner in which the new-venture team takes shape. The size of the founding team and the qualities of the founder or founders are the two most important issues in this matter.

Size of the Founding Team

The first decision that most founders face is whether to start a firm on their own or whether to build an initial founding team. Studies show that 50 to 70 percent of all new firms are started by more than one individual. However, experts disagree about whether new ventures started by a team have an advantage over those started by a sole entrepreneur. Teams bring more talent, resources, ideas, and professional contacts to a new venture than does a sole entrepreneur.

Qualities of the Founders

The second major issue pertaining to the founders of a firm is the qualities they bring to the table. In the previous several chapters, we described the importance investors and others place on the strength of the firm’s founders and initial management team. One reason the founders are so important is that in the early days of a firm, their knowledge, skills, and experiences are the most valuable resource the firm has. Because of this, new firms are judged largely on their “potential” rather than their current assets or current performance. In most cases, this results in people judging the future prospects of a firm by evaluating the strength of its founders and initial management team.

The Management Team and Key Employees

Once the decision to launch a new venture has been made, building a management team and hiring key employees begins. Start-ups vary in terms of how quickly they need to add personnel. In some instances, the founders work alone for a period of time while the business plan is being written and the venture begins taking shape. In other instances, employees are hired immediately.

The Roles of the Board of Directors

If a new venture organizes as a corporation, it is legally required to have a board of directors—a panel of individuals who are elected by a corporation’s shareholders to oversee the management of the firm. A board is typically made up of both inside and outside directors. 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. A board of directors has three formal responsibilities: (1) appoint the firm’s officers (the key managers), (2) declare dividends, and (3) oversee the affairs of the corporation.

Provide Expert Guidance

Although a board of directors has formal governance responsibilities, its most useful role is to provide guidance and support to the firm’s managers. Many CEOs interact with their board members frequently and obtain important input. The key to making this happen is to pick board members with needed skills and useful experiences who are willing to give advice and ask insightful and probing questions.

Lend Legitimacy

Providing legitimacy for the entrepreneurial venture is another important function of a board of directors. Well-known and respected board members bring instant credibility to the firm. Achieving legitimacy through high-quality board members can result in other positive outcomes. Investors like to see new-venture teams, including the board of directors, that have people with enough clout to get their foot in the door with potential suppliers and customers. Board members are also often instrumental in helping young firms arrange financing or funding.

Rounding Out the Team: The Role of Professional Advisers

Along with the new-venture team members we’ve already identified, founders often rely on professionals with whom they interact for important counsel and advice. In many cases, these professionals become an important part of the new-venture team and fill what some entrepreneurs call “talent holes.”

Board of Advisors

Some start-up firms are forming advisory boards to provide them direction and advice. An advisory board is a panel of experts who are asked by a firm’s managers to provide counsel and advice on an ongoing basis. Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice.

Lenders and Investors

As emphasized throughout this book, lenders and investors have a vested interest in the companies they finance, often causing these individuals to become very involved in helping the firms they fund. It is rare that a lender or investor will put money into a new venture and then simply step back and wait to see what happens. In fact, the institutional rules governing banks and investment firms typically require that they monitor new ventures fairly closely, at least during the initial years of a loan or an investment.

Other Professionals

At times, other professionals assume important roles in a new venture’s success. Attorneys, accountants, and business consultants are often good sources of counsel and advice.

Consultants

A consultant is an individual who gives professional or expert advice. New ventures vary in terms of how much they rely on business consultants for direction. In some ways, the role of the general business consultant has diminished in importance as businesses seek specialists to obtain advice on complex issues such as patents, tax planning, and security laws. In other ways, the role of general business consultant is as important as ever; it is the general business consultant who can conduct in-depth analyses on behalf of a firm, such as preparing a feasibility study or an industry analysis.

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