Chapter 6
Successfully Building a New Venture Team
Entrepreneurship: Successfully Launching New Ventures
Modified from Barringer and Ireland (2006)
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
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.)
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
1. Higher education
2. Prior entrepreneurial experience
3. Relevant industry experience
4. 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
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
– Advertising the position good for lower-level employees
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 lessen impact of liabilities of newness) if the BOD consists of wellknown 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
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
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
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 act as advisors?
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
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