MGT 320 Chapter 9 Worksheet

  1. In the space provided below, describe the concept liability of newness.

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

2. Below list the seven elements of a new venture team.

1. Group of founders

  1. Management team
  2. Key employees
  3. Boards of directors
  4. Boards of advisers
  5. Lenders and Investors (VCs, angels and Bankers)
  6. Others (e.g., accountants, attorneys, etc.)

3. According to Chapter 9, what four characteristics of a venture’s founders are important determinants of the venture’s success? List and describe.

  1. Higher education
  2. Prior entrepreneurial experience
  3. Relevant industry experience
  4. The ability to “network” effectively

4. What are two factors that can increase the likelihood of success for firms that are founded by a team?

Teams more successful if:

  1. they have previously worked together &
  2. the teams are heterogeneous
  1. What are two potential problems that firms founded by teams need to be aware of?

1)Members may not get along

2)As firm grows, if need to establish a formal structure with a hierarchy, may cause problems

6. What are main differences between a Board of Directors (BOD) and a Board of Advisors (BOA)?

  1. A BOD is legally required if the firm is legally organized as a corporation.
  2. A BOA is never legally required.
  3. A BOD is legally responsible (e.g., has fiducially responsibilities) for their actions, advice, guidance, etc.
  4. Corporations are legally required to follow the guidance set for by the BOD.
  5. A BOA has no legally responsibilities and the firms that have a BOA are not legally required to follow their guidance.

7. What are main similarities between a Board of Directors and a Board of Advisors?

  1. Both can help the firm gain credibility/legitimacy and reduce liabilities of newness, particularly if they consist of well-known and respected people
  2. The most useful role for both is to provide guidance and support the firm’s managers
  3. They both consist of a panel of experts who provide counsel and advice on an ongoing basis.
  1. What are the three main responsibilities for a Board of Directors?

BODs have three formal and fiduciary responsibilities as follows:

  1. Appoint the officers of the firm
  2. Declare dividends
  3. Oversee the affairs of the corporation
  1. What guidelines should one consider when organizing a Board of Advisors?
  1. Make sure they play a meaningful role in the firm’s development and growth
  2. Look for members who are compatible and complementary (heterogeneous) in terms of experience
  3. When inviting people to be on BOA, be sure to carefully spell out the “rules”
  4. Be sure to define what their role is
  5. Be sure to address how they should handle access to confidential information
  1. What are the two important considerations entrepreneurs need to be aware of when dealing with lenders and investors?
  1. Their goals are sometimes not inline with entrepreneurs’ (e.g., they often want a liquidity event so they can recoup their investment)
  2. Often require substantial controlling power and profit percentages
  1. When organizing their new venture team, what can a start-up do to reduce the effects of liabilities of newness?

One way to overcome liabilities of newness is via a talented and experienced new venture team. This is especially the case when the new venture team has a track record (e.g., via their experience) because they can provide legitimacy for external others. In sum, research shows that the composition of the team is an important success factor of new ventures

  1. What is the main difference between venture capitalist investors (VC) and angel investors?

VCs manage a pool of other people’s money whereas angels invest their own money.

  1. Consider high growth firms versus salary substitute firms. What different factors do founders of these two types of firms need to keep in mind when determine when and why they should hire employees?

High growth firms usually hire employees based on need and knowledge specialization. For example, eBay needed a CEO and the founder was only experienced in IT-related tasks. Consequently, eBay hired Meg Whitman who was experienced in business.

The primary determinants for salary substitute and lifestyle firms when hiring employees are time issues (e.g., need to free up the founder(s) for other tasks), necessity (need more people to help run the business and/or need additional areas of expertise), and financial abilities (e.g., the firm can afford to hire employees).

For both types of firms the founder(s) need to evaluate their skills for shortcomings and/or skills that are necessary for the firm to be successful. They would then hire employees that reduce these shortcomings.