Chapter 4

“New Venture Creation

& Development”
Gagan Kumar B R
 New Venture Development
New Venture:-
Meaning:-A new venture is a start-up entity developed with an intent of
profiting financially.
Introduction:-
Most of business ventures are created based on the demand of the
market or lack of supply in the market. Needs of consumers are identified
for a product or services and the entrepreneur and investors will proceed
to develop the idea, market the idea, and sell the product or service so
developed. Many ventures will be invested in by one or
more individuals or groups with the expectation of the business
bringing in a financial gain for all.
New Venture Development:-
New Venture Development is a beginning stage in the life cycle of a
business when the new business is being evaluated and then created.
 *****The Challenges of New-Venture Start-Ups
1. Planning:- “Failing to plan is a plan in itself to fail”
2. Competition:-One of the biggest challenges for any startups is competition.
So much opportunity exists for entrepreneurs because switching costs for most
customers are low and many are willing to try new, relatively untested
technologies.
3. Need or Gap Fixing: The challenge to deliver a product or service that
meets a critical need better than anyone else does. When the well-planned and
executed product meets the urgent need, the business will flourish regardless
of the economic climate.
4. Strategy & Execution: Focusing on smart execution is the key no
matter how great the idea is. People would have thought of the idea before but
if you can execute that well and in the right time slots you end-up being the
winner.
5. Raising Finance.
6. Investors & Valuation: Financing is tough even when you have investor
interest. Selecting the right investors and getting the right valuation is
challenging.
7. Human Capital: Finding the right team who can share the same
passion as the founders is the most challenging part.
8. Cash Flows: Handling cash flows both in terms of short term and
long term objective is key. As an entrepreneur he or she needs to
look at this key aspect very minutely.
9. Customer Acquisition & Retention. It is just not only about
running for the customers, but also about retention of these
customers so that the fixed retainer is coming every month.
10. Unrealistic Expectations. Should think of a best scenario and
a worst scenario and prepare for both.
11. Research: Gathering primary and secondary data to back certain
assumptions on business projections is the key
12. Marketing Strategy: Marketing Strategy, in general, is to
focus at limited resources and on the best opportunities to increase
sales and thereby achieve a sustainable competitive advantage.
 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
Reasons for Starting a Venture

Personal The The

Characteristics Environment Venture

Entrepreneurial
Motivations
 *******Pitfalls in Selecting New Ventures

1. Lack of objective evaluation

2. No real insight into the market
3. Inadequate understanding of technical
requirements
4. Poor financial understanding
5. Lack of venture uniqueness
6. Ignorance of legal issues
Phases in New-Venture Start-ups
(NIS)
• Prestart-up Phase
– Begins with an idea for the venture and ends when the
doors are opened for business.
• Start-up 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.
• Post-start-up Phase
– Lasts until the venture is terminated or the surviving
organizational entity is no longer controlled by an
entrepreneur.
 ******Explain those “Critical Factors, Evaluations &
Checklist” for New-Venture Development?

Critical factors
1. Uniqueness of venture
2. Investment size
3. Expected sales growth
– Lifestyle ventures
– Small profitable ventures
– High-growth ventures
4. Product availability
5. Customer availability
 Critical Evaluation.

1. Profile Analysis
– Involves identifying and investigating the financial, marketing,
organizational, and human resource variables that influence the
business’s potential before the new idea is put into practice.
2.The Feasibility Criteria Approach
– Involves the use of a criteria selection list from which
entrepreneurs can gain insights into the viability of their
venture.
3.Comprehensive Feasibility Approach
– Incorporates external factors in addition to those included in the
criteria questions.
4.Feasibility Criteria Approach.
Assessing the viability of a venture:
– Is it proprietary?
– Are the 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?
 Table
9.1 Critical Checklist
(A). Basic Feasibility of the Venture
1. Can the product or service work?
2. Is it legal?
(B). Competitive Advantages of the Venture
1. What specific competitive advantages will the product or service offer?
2. What are the competitive advantages of the companies already in business?
3. How are the competitors likely to respond?
4. How will the initial competitive advantage be maintained?
©. Buyer Decisions in the Venture
1. Who are the customers likely to be?
2. How much will each customer buy, and how many customers are there?
3. Where are these customers located, and how will they be serviced?
(D). Marketing of the Goods and Services
1. How much will be spent on advertising and selling?
2. What share of market will the company capture? By when?
3. Who will perform the selling functions?
4. How will prices be set? How will they compare with the competition’s prices?
5. How important is location, and how will it be determined?
6. What distribution channels will be used—wholesale, retail, agents, direct mail?
7. What are the sales targets? By when should they be met?
8. Can any orders be obtained before starting the business? How many? For what total amount?
Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
 Table
Critical Checklist (cont’d)
(E). Production of the Goods and Services
1. Will
the company make or buy what it sells? Or will it use a combination of these two
strategies?
2. Are sources of supplies available at reasonable prices?
3. How long will delivery take?
4. Have adequate lease arrangements for premises been made?
5. Will the needed equipment be available on time?
6. Do any special problems with plant setup, clearances, or insurance exist? How will they
be resolved?
7. How will quality be controlled?
8. How will returns and servicing be handled?
9. How will pilferage, waste, spoilage, and scrap be controlled?
(F). Staffing Decisions in the Venture
1. How will competence in each area of the business be ensured?
2. Who will have to be hired? By when? How will they be found and recruited?
3. Will a banker, lawyer, accountant, or other advisers be needed?
4. How will replacements be obtained if key people leave?
5. Will special benefit plans have to be arranged?
Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
 Critical Checklist (cont’d)

(G). Control of the Venture

1. What records will be needed? When?
2. Will any special controls be required? What are they? Who will be responsible for
them?

(H). Financing the Venture

1. How much will be needed for development of the product or service?
2. How much will be needed for setting up operations?
3. How much will be needed for working capital?
4. Where will the money come from? What if more is needed?
5. Which assumptions in the financial forecasts are most uncertain?
6. What will be the return on equity, or sales, and how does it compare with the rest of the
industry?
7. When and how will investors get their money back?
8. What will be needed from the bank, and what is the bank’s response?

Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
 *******Why New Ventures Fail

Reasons:-
• Product/Market Problems
• Financial Difficulties
• Managerial Problems
******Explain the Causes for New Venture Failure?

1. Product/Market Problems
– Poor timing 3.Managerial Problems
– Product design problems – Concept of a team approach
– Inappropriate distribution – Human resource problems
strategy
– Unclear business definition
– Overreliance on one customer
2.Financial Difficulties
– Initial undercapitalization
– Assuming debt too early
– Venture capital relationship
problems
 Table
9.2 Types and Classes of First-Year Problems
5. Production/operations management
1. Obtaining external financing
• Establishing or maintaining quality
• Obtaining financing for growth control
• Other or general financing problems • Raw materials/resources/supplies
2. Internal financial management • Other or general production/operations
• Inadequate working capital management problems
• Cash-flow problems 6.General management
• Other or general financial management • Lack of management experience
problems • Only one person/no time
3. Sales/marketing • Managing/controlling growth
• Low sales • Administrative problems
• Dependence on one or few • Other or general management problems
clients/customers
7. Human resource management
• Marketing or distribution channels
• Recruitment/selection
• Promotion/public relations/advertising
• Turnover/retention
• Other or general marketing problems
• Satisfaction/morale
4. Product development
• Employee development
• Developing products/services
• Other or general human resource
• Other or general product development management problems
problems
8. Economic environment
• Poor economy/recession
• Other or general economic environment
Source: David E. Terpstra and Philip D. Olson, ―Entrepreneurial Start-up and Growth: problems
A Classification of Problems,‖ Entrepreneurship Theory and Practice (spring 1993): 19.
9. Regulatory environment
• Insurance
 Figure
9.2 Internal and External Problems Experienced by Entrepreneurs

Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, ―Stage of Organization Life Cycle and Competition as Mediators of Problem
Perception for Small Businesses,‖ Strategic Management Journal 15 (1994): 129. Reprinted by permission of John Wiley & Sons, Ltd.
 Table
9.3 Determinants of New-Venture Failures

Entrepreneur Rank Venture Capitalist Rank

I—Lack of management skill 1 I—Lack of management skill 1

I—Poor management strategy 2 I—Poor management strategy 2

I—Lack of capitalization 3 I—Lack of capitalization 3

I—Lack of vision 4 E—Poor external market conditions 4

I—Poor product design 5 I—Poor product design 5

I—Key personnel incompetent 6 I—Poor product timing 6

E = External factor
I = Internal factor

Source: Andrew L. Zacharakis, G. Dale Meyer, and Julio DeCastro, ―Differing Perceptions of New Venture Failure: A Matched
Exploratory Study of Venture Capitalists and Entrepreneurs,‖ Journal of Small Business Management (July 1999): 8.
 New Venture Failure Prediction Model

1. Role of profitability and cash flows

2. Role of debt
3. Combination of both
4. Role of initial size
5. Role of velocity of capital
6. Role of control
 Table
9.4 The Failure Process of a Newly Founded Firm

1. Extremely high indebtedness (poor static solidity) and

small size
2. Too slow velocity of capital, too fast growth, too poor
profitability (as compared to the budget), or some
combination of these
3. Unexpected lack of revenue financing (poor dynamic
liquidity)
4. Poor static liquidity and debt service ability (dynamic
solidity).

Source: Erkki K. Laitinen, ―Prediction of Failure of a Newly Founded Firm,‖ Journal of Business Venturing (July 1992): 326–328. Reprinted with permission.
Calculative Problems on Proposed
New Venture Ideas
 5 Essentials for Potent Evaluation of a
Proposed Venture

1. Quantification of Target Market Size

2. Size of Desired Market Share?
3. Desired Margin?
4. Expected EBITDA
5. Probability of Success?

EBITDA = Earnings before interest, tax, depreciation and amortization

 Size of the Target Market

• Q=NxU

• Q = Opportunity Size of the Target Market in Quantity

• N = No. of Potential Customers in the Target Market
• U = Units Consumed Per Customer Per Day/Month/Year
 Size of the Target Market in $ or ₹

S=QxP

• S = Opportunity Size of the Target Market in $ or ₹

• Q = Opportunity Size of the Target Market in Quantity
 P = Price (in $ or ₹) that the target customers are willing to Pay for Each Unit
of Product.
 Aspired Market Share in Quantity

• QA = Q x FA Units

• QA = Aspired Market Share in Quantity

• FA = Aspired % of Market Propose to Capture
Value of Aspired Slice of Market Share in $ or ₹

• VA = QA x PA

• VA = Value of Aspired Slice of the Target Market in $ or ₹

• QA = Aspired Market Share in Quantity
• PA = Aspired Price for Venture’s Product in $ or ₹
 Maximum Expected EBITDA in $ or ₹

• EMAX = Q Max x MA

• EMAX = Maximum Expected EBITDA in $

• Q Max = Maximum Market Share in Quantity
• MA = Aspired Margin in $ or ₹ Per Unit of Sale in $ or ₹
 Minimum Expected EBITDA in $ or ₹

• EMIN = Q Min x MMin

• EMin = Minimum Expected EBITDA in $

• Q Min = Minimum Market Share in Quantity
• MMin = Min. Acceptable Margin Per Unit of Sale in $ or ₹
 Probability of Success

• PS = 0.1 to 0.99

• Risks are High, if Ps ≤ 0.5

• Risks are Less if Ps ≥ 0.6
• The Venture is Viable, if the RE ≥ All Costs

• RE = Expected Revenue Per Annum = QAQ x PR

• QAQ = Actual Quantity Sold
• PR = Price at which each Unit was sold
 Market Competition

• MC = 0 to 1
• 0 = No Competition = New Product
• = Customers are unaware of the product and its benefits and could be
difficult to convince and customers might even be reluctant to try.
• Probability of success is unknown.

• 1 = Highly Competitive
• Customers are fully aware of the product and its benefits, but might be
reluctant to switch.
• Strategy is differentiation.
• Probability of success is difficult.
 Exercise 1
Q.
Venture: A New Drinking Water Bottle For Indian Market
1. Target Market Size = 30% of 1.2 billion Indian Customers
(Mainly Residents of Cities and Towns) yearly calculus
2. Everyone Need to Drinks 2 Liters of Water / Day = Q
3. Market Price of 1 Liter Drinking Water = ₹ 10 = P
4. Target Market Share = 1% of Market = FD
5. You wish to have a Profit / Liter of Drinking Water = ₹ 1.0 or
₹ 0.50 = Ma
6. And Say the Probability of Success is 40%
a) Calculate the Market Size of Bottled Drinking Water in
Quantity & ₹?
b) Calculate the Size of Your Market Share in ₹
c) Calculate Your Expected Yearly EBITDA for ₹ 0.50 Margin
Per 1 Liter Bottle.
 Exercise 1
Solution.
Estimate Your Yearly Profit? (This is Just a Draft of Final Solution)*
Showing the Proof of Calculation in detail is a Must, Do not follow this Solution better
Practice.. It is Just a Draft not a Detailed Solution
Requirement of Drinking Water for All Indians N = 1.2 x 2 X 109 Liters/ Day
• The Market Size of Bottled Drinking Water of India = 1.2 *2 * 109 * 0.3 =
2.4 * 0.30 = 0.72 x 109 Liters/ Day
• Market Size in ₹ = 0.72 x 109 * ₹ 10 = 720 Cr./ Day
• Yearly Market Size in ₹ = 720 * 30 * 12 = ₹ 2,59200 Cr. / Year
• 1% of Market Share 259200 Cr./ Yr. = 2592 Cr/ Yr.
• Total Revenue/ Yr. = 2592 Cr./ Yr.
• Your Market Share in Quantity = 2,592,000,000 Liters
• Your EBITDA at ₹ 0.5 Margin/ Litter = 129.6 Cr/ Yr.
• If Probability of Success = 40% Interpretation is Required ?
• Then the Component of Risk of Failure is = 60% Interpretation is
Required ?
• MC = 1
 Thank You
This Slides are designed by Mr. Gagan Kumar B R, III-Bangalore and has extensively adapted from
few material sources. © 2017 Cengage Learning. All rights reserved. This material is intended to be
used as a basis for class room discussion rather than to illustrate either effective handling of an
administrative situation. It draws extensively on publicly available information.