Building A New Venture Team

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Chapter 6

• Building A New Venture Team

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Chapter 6 Focus

• This chapter focuses on the important task of
  building a new venture team. The point
  emphasized is that a firms new venture team
  doesnt consist merely of its founders and its
  initial employees, but of its board of directors
  (if it is incorporated), its board of advisors,
  its lenders and investors (if applicable), and
  other professionals that the firm does business
  with.

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You Need to Be able to Answer

• Identify the primary elements of a new venture
  team.
• Explain the term liability of newness.
• Discuss the difference between heterogeneous and
  homogenous founding teams.
• Identify the personal attributes that strengthen
  a founders chances of launching a successful new
  firm.
• Explain the actions of an executive-search firm.
• Identify the two primary ways in which the
  non-employee members of a start-ups new venture
  team help the firm.
• Describe a board of directors and explain the
  difference between inside directors and outside
  directors.
• Describe the concept of signaling and explain why
  its important.
• Discuss the purpose of forming an advisory board.
• Explain why new venture firms use consultants for
  help and advice.

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5 Building a New Venture TeamKey Terms

• Advisory board
• Board of directors
• Consultant
• Executive-search firm
• Founding team
• Heterogenous team
• Homogenous team
• Inside director
• Liability of newness

• Networking
• New venture team
• Outside director
• Prior entrepreneurial experience
• Relevant industry experience
• signaling

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Creating a New Venture Team

• 1. A new venture team is the group of founders,
  key employees, and advisers
• that move a new venture from an
  idea to a fully functioning firm.
• 2. Usually the team doesnt come together all at
  once. Instead, it is built as the
• new firm can afford to hire
  additional personnel.
• 3. The team also involves more than paid
  employees. Many firms have boards
• of directors, boards of
  advisers, and professionals on whom they rely for
  
• direction and advice.
• 4. New ventures have a high propensity to fail.
• The high failure rate is due in
  part to what researchers call the liability of
• newness, which refers to the
  fact that companies often falter because the
• people who start the firms
  cant adjust quickly enough to their new roles
  and
• because the firm lacks a track
  record with outside buyers and suppliers.

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Founder or Founders

• 1. Size of 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 more than one individual starts 50 to 70
  percent of all new firms.
• It is generally believed that new ventures
  started by a team have an advantage over those
  started by an individual because a team brings
  more talent, resources, ideas, and professional
  contacts to a new venture than does a sole
  entrepreneur.

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Overcoming Liabilities of Newness

• Liabilities of Newness
• New ventures have a high propensity to fail.
• The high failure rate is due in part to what
  researchers call the liability of newness, which
  refers to the fact that companies often falter
  because the people who start the firms cant
  adjust quickly enough to their new roles and
  because the firm lacks a track record with
  outside buyers and sellers.
• Assembling a talented and experienced new venture
  team is one path that firms can take to overcome
  these limitations.

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Separate Elements of a New Venture Team
Figure 6.1 Elements of a New Venture Team
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The Founder or Founders(1 of 5)

• Founder or Founders
• The characteristics of the founder or founders of
  a firm and their early decisions have a
  significant impact on the manner in which the new
  venture team takes shape.
• Size of the Founding Team
• Studies have shown that 50 to 70 of all new
  ventures are started by more than one individual.
• It is believed that new ventures started by a
  team rather than a single entrepreneur have an
  advantage.

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The Founder or Founders(2 of 5)
It is generally believed that new ventures
started by a team have an advantage over those
started by an individual because a team brings
more talent, resources, ideas, and professional
contacts to a new venture than does a sole
entrepreneur. In addition, the psychological
support that cofounders of a new business can
offer one another is an important elements in the
firms success.
Waveset Founding Team
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The Founder or Founders(3 of 5)

• Qualities of Founders
• Several factors are thought to be significant to
  a founders success.
• Higher education
• Prior entrepreneurial experience
• Relevant industry experience
• The ability to network effectively
• The importance of these attributes are described
  on the next two slides.

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Founder or Founders(4 of 5)
Table 6.1 Preferred Attributions of the Founder
or Founders of a Firm
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Founder or Founders(5 of 5)
Table 6.1 (continued) Preferred Attributions of
the Founder or Founders of a Firm
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Recruiting and Selecting Key Employees

• Recruiting Key Employees
• Startups vary in terms of how quickly they need
  to add personnel.
• In some instances, the founders will work alone
  for a period of time. In other instances,
  employees are hired immediately.
• Some founders draw upon their network of contacts
  to identify candidates for key positions (or go
  through placement offices like those at your
  college or university), and some rely on
  executive search firms.

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The Roles of the Board of Directors(1 of 3)

• Board of Directors
• If a new venture organizes as a corporation, it
  is legally required to have a board of directors.
• A board of directors is a panel of individuals
  who are elected by a corporations shareholders
  to oversee the management of the firm.
• A board is typically made up of both inside
  directors 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.

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The Roles of the Board of Directors(2 of 3)

• Formal Responsibility of the Board
• A board of directors has three formal
  responsibilities.
• Appoint the officers of the firm
• Declare dividends
• Oversee the affairs of the corporation
• Frequency of Meetings and Compensation
• Most board of directors meet three to four times
  a year.
• New ventures are more likely to pay their boards
  in company stock or ask them to service on a
  voluntary basis, rather than pay a cash
  honorarium.

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The Roles of the Board of Directors(3 of 3)
Ways a Board of Directors Can Help a New Venture
Get Off to a Good Start
Function
Importance of Function
Although a board of directors has formal
governance responsibilities, its most useful role
is to provide guidance and support to the firms
managers. Many founders and CEOs interact with
their board members frequently and obtain
important input and advice.
Provide Guidance
Another important function of a board of
directors is to lend legitimacy to a firm.
Well-known and respected board members bring
instant credibility to the firm.
Lend Legitimacy
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Rounding Out the Team The Role of Professional
Advisors
Board of Advisors
Lenders and Investors
Other Professionals
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Board of Advisors(1 of 4)

• Board of Advisors
• A board of advisors is a panel of experts who are
  asked by a firms 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.
• An advisory board can be set up for general
  purposes or can be set up to address a specific
  issue or need.

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Board of Advisors(2 of 4)

• Board of Advisors (continued)
• Many people are more willing to serve on a
  companys board of advisors than its board of
  directors because it requires less time and there
  is no potential legal liability involved.
• Like the members of a board of directors, the
  members of a companys board of advisors provide
  guidance and lend credibility to the firm.
• An example of a board of advisors is shown on the
  next slide.

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Board of Advisors(3 of 4)
Board of Advisors of BeautyBuys.com
Name
Profession
Role on Advisory Board
Chazz Palminteri
Hollywood actor, writer, and director
Adds legitimacy to the firm
Lawrence K. Fleischman
President of a financial consulting firm
Adds legitimacy and provides the firm advice on
financial issues
VP of Business Development for an advertising firm
Adds legitimacy and provides the firm advice on
advertising related issues
Kim Lockerbie
Dr. Helen Flamenbaum
A medical doctor specializing in dermatology
Adds legitimacy and provides the firm advice on
medical related issues
KZS Advertising
A full-service advertising and marketing firm
Adds legitimacy and provides the firm advice on
advertising related issues
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Board of Advisors(4 of 4)

• Guidelines to Organizing a Board of Advisors
• Advisors will become disillusioned if they dont
  play a meaningful role in the firms development
  and growth.
• A firm should look for board members who are
  compatible and complement one another in terms of
  experience and expertise.
• When inviting people to serve on its board of
  advisors, a company should carefully spell out to
  the individuals involved the rules in terms of
  access to confidential information.

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Lenders and Investors(1 of 2)

• Lenders and Investors
• Lenders and investors have a vested interest in
  the companies they finance, often causing them to
  become very involved in helping the firms they
  fund.
• Like the other non-employee members of a firms
  new venture team, lenders and investors help new
  firms by providing guidance and lending advice.
• In addition, a firms lenders and investors
  assume the natural role of providing financial
  oversight.

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Lenders and Investors(2 of 2)
Table 6.3 Beyond Financing and Funding Ways
Lenders and Investors Add Value to a New Venture
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Other Professionals

• Other Professionals
• The other professionals that make up a firms new
  venture team, which vary by firm, include
  attorneys, accountants, and business consultants.
  
• Business Consultants
• A business consultant is an individual who gives
  professional or expert advice.
• Business consultants fall into two categories
  paid consultants and consultants who are
  available for free or at a reduced rate through a
  nonprofit or governmental agency.

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Review Questions

• Chapter 9 Building a New Venture Team

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Review Question 1

• What is a new venture team? Who are the primary
  participants in a start-ups new venture team?
• A new venture team is the group of founders, key
  employees, and advisors that move a new venture
  from an idea to a fully functioning firm. The
  components of a new venture team are shown in
  Figure 6-1 in the textbook. They include
  management team, key employees, board of
  directors (if the firm is incorporated), board of
  advisors, lenders and investors (if applicable),
  and other professionals.

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Review Question 2

• What is liability of newness? What can a new
  venture do to overcome the liability of newness?
• Liability of newness is a concept that refers to
  the fact that startups often falter because the
  people who start the firms cant adjust quickly
  enough to their new roles and because the firm
  lacks a track record with outside buyers and
  suppliers.

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Review Question 3

• Describe the difference between a heterogeneous
  and a homogeneous founding team.
• The members of a heterogeneous founding team are
  diverse in terms of their abilities and
  experiences.
• In contrast, the members of a homogeneous
  founding team are similar to one another in terms
  of their abilities and experiences.

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Review Question 4

• List several factors that enhance the value of a
  new venture team.
• The following are factors that enhance the value
  of a new venture team
• Founders who are aware of their own limitations
  and are willing to hire professional management
  when needed.
• Firms that are started by individuals that have
  worked together before and get along with one
  another.
• Teams that are heterogeneous rather than
  homogeneous.

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Review Question 5

• Describe the two potential pitfalls of using a
  team to start a firm.
• First, the team members may not get along.
  Second, if two or more people start a firm as
  equals, conflicts can arise when the firm needs
  to establish a formal structure and designate one
  person as the CEO.

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Review Question 6

• What are the personal attributes that affect a
  founders chances of launching a successful new
  firm? In your judgment, which of these attributes
  are the most important? Why?
• The following are personal attributes that affect
  a founders changes of launching a successful
  firm
• Educational level attained
• Prior entrepreneurial experience
• Relevant industry experience
• Networking abilities

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Review Question 7

• Explain why having prior entrepreneurial
  experience helps the founder of a firm.
• Because launching a new venture is a complex
  task, entrepreneurs with prior start-up
  experience have a distinct advantage.

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Review Question 8

• Define the term networking. Why is it important
  for an entrepreneur to have a vibrant social and
  professional network?
• Networking is building and maintaining
  relationships with people whose interests are
  similar or whose relationships could bring
  advantages to a firm. It is important for an
  entrepreneur to have a vibrant professional and
  social network. The way this might play out in
  practice is that a founder calls a business
  acquaintance or friend to ask for an introduction
  to a potential investor, business partner, or
  customer.

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Review Question 9

• What are the two reasons that prompt new ventures
  to use executive-search firms to help them
  identify and screen key employees.
• First, the process of recruiting and screening
  job candidates is time consuming, reducing the
  amount of time founders have to spend on other
  critical tasks.
• Second, the initial hires that firms make are
  often critical to their eventual success.

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Review Question 10

• What is a board of directors? What is the
  difference between inside and outside directors?
• A board of directors is a panel of individuals
  who are elected by a corporations 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.

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Review Question 11

• Describe the three formal responsibilities of a
  board of directors.
• The three formal responsibilities of a board of
  directors are as follows
• appoint the key officers of the firm,
• declare dividends, and
• oversee the affairs of the corporation.

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Review Question 12

• Explain why recruiting a well-known and highly
  respected board of directors lends legitimacy to
  a firm.
• An important function of the board of directors
  is to lend legitimacy to a firm.
• For example, just imagine the positive buzz a
  firm could generate if it could say that Larry
  Page, one of the cofounders of Google, had agreed
  to serve on its board of directors.

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Review Question 13

• Define the term signaling.
• When a respected individual joins the board of
  directors of a firm, it sends a message or signal
  to the marketplace. Presumably, a high-quality
  individual would be reluctant to serve on the
  board of a low-quality firm because that would
  put his or her reputation at risk.
• So when a high quality individual does agree to
  serve on a board of a firm, the individual is in
  essence signaling that the company has
  potential to be successful.

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Review Question 14

• Discuss the purpose of forming an advisory board.
  If you were the founder of an entrepreneurial
  firm, would you set up an advisory board? Why or
  why not?
• An advisory board is a panel of experts who are
  asked by a firms managers to provide counsel and
  advice on an ongoing basis. Most students will
  say that if they were the founder of an
  entrepreneurial firm, they would set up an
  advisory board.
• The potential advantages of setting up an
  advisory board outweigh the potential
  disadvantages in most cases.

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Review Question 15

• Describe the different ways that advisory boards
  meet and conduct their business.
• Boards of advisors interact with each other and
  with a firms managers in several ways. Some
  advisory boards meet three or four times a year
  at the companys headquarters or in another
  location. Other advisory boards meet in an
  online environment.
• In some cases, a firms board of advisors are
  scattered across the country, making it more cost
  effective for a firms managers to interact with
  the members of the board on the telephone or vie
  e-mail rather than bringing them physically
  together. In these situations, board members
  dont interact with each other at all on a
  face-to-face basis yet still provide high levels
  of counsel and advice.

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Review Question 16

• Describe several of the guidelines to setting up
  a board of advisors.
• A board of advisors should not be organized just
  so a company can boast of it.
• A firm should look for board members who are
  compatible and complement one another in terms of
  experience and expertise.
• When inviting a person to serve on its board of
  advisors, a company should carefully spell out to
  the individual the rules in terms of access to
  confidential information.

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Review Question 17

• In what ways do lenders and investors lend
  legitimacy to a firm?
• Like board members, lenders and investors lend
  legitimacy to a firm when they agree to become
  involved.
• Again, think about the positive buzz that would
  be created about a firm if it announced that a
  prominent venture capital firm had decided to
  offer it funding.

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Review Question 18

• Explain why new ventures often turn to
  consultants for advice.
• If a new firm needs help in a specialized area,
  it may be more cost effective to hire a
  consultant to do the work, rather than to hire
  one or more additional employees.

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Application Question 7

• Bill Carroll plans to start a chain of fitness
  clubs.
• Bill is making a poor decision, because it is
  difficult for a sole entrepreneur to
• know everything there is to know to launch a
  successful startup and
• establish the legitimacy of the firm. A board of
  directors and a board of advisors help a startup
  overcome both of these obstacles.
• The two primary functions of both groups are to
  (1) provide guidance and (2) lend legitimacy to a
  firm.

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Chapter Summary

• You need to realize how important it is to
  surround yourself with people who can complement
  the skills and strengths you bring to your
  business.
• Always conduct gap analysiswhat holes do you
  have in your management team and how can you fill
  them?
• You must understand how to recruit and manage an
  effective board of directors, effective board of
  advisors and other external specialists