Relation between Entrepreneur and New Venture - Essay Example

What is the Relation between Entrepreneur and New Venture? Introduction At the center of tempestuous evolution and revolution of 21st century, entrepreneurship has become one of the auspicious routes that many people are following, enabling them to attain their individual objectives, sustain high standards of living, satisfy their wants, and apply their skills and talents in an effective, satisfactory, and rational way (Kariv 2013, p 4). There is no agreed definition of entrepreneur, but entrepreneurship is related to new business ventures. An entrepreneur is an individual who establishes new business ventures for profit making purposes (Lussier, et al 2014, p.4). In the entrepreneurship sphere, creation of a new venture is a separate and distinct phenomenon, which includes business formation, acquisition and mergers, and advancing the business (Kariv 2013, p. 1). The creation of a new venture is a complex, crucial, and multidimensional process that involves interaction between an individual and his socio-economic environment (Tang 2007, p. 451). The process is critical because it designs the future ventures building blocks; principally, it comprises the activities, ideas, actions and techniques displayed by entrepreneurs towards materializing their visions and concepts into an operating business (Kariv 2013, p. 2). This clearly shows that in order for an entrepreneur to be successful, he or she must possess a high level of mental hardness to assist him or her persevere and make operational strategic decisions (Hmieleski & Carr 2008, p.1). The stages of creating a new venture occur in the mind of entrepreneurs through interaction with the society and on the computer while the real venture activities have not been started. The major viewpoints introduced in the process of creating a new venture include the following: 1) recognition of type of prospects; notions to be executed as future business. 2) Vision; different activities and strategies that are normally applied in the initial stages of the new venture. 3) Groundwork is an important factor that enables materialization of the concept into real business. 4) Intention of financing the future ventures 5) The sense of planning and ensuing impacts on the entrepreneur and the venture 6) Quality of the entrepreneurial profile of persons showing a new business formation process 7) Environment, which is a major contributor to the process (Kariv 2013, p. 2). Education and skills play a key role in creating new ventures. When an entrepreneur lacks formal education, but only has start-up, managerial, and high-growth experience, the profitability tends to be low. On the other hand, a venture is likely to have a positive growth if an entrepreneur has professional know-how of the product, which is gained from previous work experience allied to that product. If the entrepreneur lacks business know-how but has start-up, managerial and high-growth experience, these results in a rather negative effect on the growth (Hmieleski & Carr 2008, p.1). The study explores entrepreneurial problems of creating a new company, reasons for the new ventures, main problems linked with the new venture, and how governance mechanism run in a new venture Entrepreneurs’ Problems in Creating a Company There are many problems that entrepreneurs go through in the process of creating a successful company. Many strategic decisions have to be made and hard challenges to be solved. The problems range from time pressure accompanied by a number of tasks to be carried out regarding financial or uncertainty risks. Theoretically, these problems are regarded as strategic challenges that need to be overcome thus enabling the entrepreneur to plan and execute an innovative and economically viable firm (Weber et al 2014, p.201). In reality, one of the single-most complex problems of creating a new company is raising capital. However, the question generated is, why is it challenging to raise money for a new venture? The answer lies with what entrepreneurs request financiers to do. Entrepreneurs pinpoint prospects for new ventures based on data they have, which investors either do not have or do not recognize. Consequently, financiers must make decisions regarding funding new ventures that face undefined future and under circumstances where they have less data about these prospects than the entrepreneur. The data asymmetry and uncertainty creates challenges in investing in new companies. Entrepreneurs, who want to raise capital from external investors, should not overlook these issues (Baron & Shane 2008, p.175). It is very crucial to understand the problem of data asymmetry and uncertainty. The element that entrepreneurs have helps identify data about their ventures prospects that financiers do not have or cannot identify thus creating three problems of raising finances. The first one is that entrepreneurs are hesitant to release their business information to investors. Consequently, they think that if they release the information to investors, they may decide to establish the prospects themselves without involving entrepreneurs. Furthermore, the financiers have adequate capital to explore the chances, and that is why entrepreneurs have to approach them. Therefore, entrepreneurs have to avoid disclosing much of their data to financiers regarding their ventures to escape the risk that the investor will explore the prospects without them. On the other hand, although entrepreneurs have to use less information that data have to help them take advantage of investors. Entrepreneurs can use superior data to acquire money from investors and utilize it for their individual benefit rather than company`s benefit. For instance, if an entrepreneur tells a financier that he needs a business car, it is hard for the investor to determine whether that is true because the entrepreneur’s information about the need might not be true. Finally, the issue of less information regarding the entrepreneur and opportunity create a room for a problem called adverse selection. This problem occurs when a person is unable to differentiate between two individuals, one with desired attributes and another without the attributes. Since it is impractical to distinguish between the two individuals, the person without preferred qualities has a reason to distort her or his qualities and represent the desired qualities. For instance, some entrepreneurs are qualified in creating new companies. If it might not identify the one with the capabilities, some may pretend to possess the capabilities. The key factor is that the investors have to select entrepreneurs carefully and execute methods for making sure they carry out their ventures as promised, and work extra hard to accomplish their success (Baron & Shane 2008, p.175). Moreover, investors face the problem of uncertainty or difficulties in prediction/forecasting which business will succeed. To begin with, the financier has to assess the value of the opportunity and capabilities of entrepreneurs based on little actual evidence. Therefore, the financiers rely on such evidence if the entrepreneur lacks a long track of success in business, which makes their decision hazardous. Finally, both investors and financiers regularly disagree about the worth of the new venture. Since new ventures are uncertain in terms of profitability, investors make funding decisions based on their own viewpoint, based on attractiveness and profitability. Their perceptions are virtually lower than those of entrepreneurs because they are always positive about their ventures. Consequently, when they negotiate with the financiers, they may have some different opinions regarding the potential of the new business (Baron& Shane 2008, p.176). It is important to note that some of these problems are morally significant and can be solved not only strategically, but also from a moral point of view. Entrepreneurs’ problems are regularly new and complex to handle. New entrepreneurs, especially when it comes to ethical issues such as honesty in communication face many challenges. It seems hard for them to foresee the moral direction and the impact of their decisions mainly at the startup of the company where no moral guidance is provided. Without any doubt, offering such guidance might be a problem, but it can assist in creating and implementing an ethical culture during post-formation phase (Weber et al 2014, p.201). Reasons for Creating a New Venture There are numerous reasons for creating a new venture. For instance, tolerance for uncertainty, preferring innovation, zeal of taking risk, and pro-activeness or determination are some of the reasons behind the creation of a new venture (Sanchez & Sahuquillo 2012, p.11498). However, the major reasons are: Financial motivation arises when an individual desires for higher financial compensation. The compensation that could occur due to employment is deemed inadequate. The compensation is regarded inadequate in two ways; one, they are considered insufficient for all people while in the other way, a person views them as satisfactory for others, but insufficient for him or her. A person believes his skills are more deserving in terms of financial rewards, and these beliefs are not uniform with the current industry rules. Thus, the probability of sufficient reward as per his or her views does not exist. This apprehension spurs the individual to start a venture that can give reward that the person believes to be proportionate with his or her skills (Sahay & Sharma 2009, p.38). Independence motivation symbolizes a psychological attribute or quality of entrepreneurs. It is a person’s desire to be independent of reporting and accountability to an authority or a system, which affects the reward system. The person’s desire is not to be bound by the constraints imposed by the system or company`s culture. It includes two dimensions: first, the person is neither grateful for the assigned work by the authority or system nor reporting the result of the assigned task as he or she perceives it as degrading. Second, the result of the task assignment is the key driver for reward since these results enhance the overall organizational goals. The assessment is not desirable for the person since he or she believes to be responsible and able enough and desires to be responsible for self only (Sahay & Sharma 2009, p.38). Lifestyle motivation is a need that drives a person to live in a particular way. Though both independence and lifestyle motivations are almost similar, they should not be confused. A particular way of spending time and working is feasible only when there is considerable amount of independence both in terms of financial and psychological aspects. The need is manifested in individual decisions on how and when to spend time without constraint (Sahay & Sharma 2009, p.38). The need for power may be individual or institutional need. The individual is reflected by his or her desire to lead others and organize teamwork. People exhibiting need for institutional power occasionally is referred to as social power. They exhibit the disposition to organize efforts of others with the aim of attaining organizational objectives (Sahay & Sharma 2009, p.39). The need for affiliation is exhibited by the individual’s logic and desire of belongingness. This need is essential for entrepreneur spirit because as it aids in maintaining harmonious relationships with others (Sahay & Sharma 2009, p.39). The need for accomplishment is a requirement for achievement or success in life that has been linked with behavior of entrepreneurs. This will power and stimulate a robust desire to do things well or better than others, including what those in power do. Individuals pushed by the need for achievement plans in advance enjoy being accountable, and prefer quick and particular feedback regarding their actions. The need for achievement is an important quality of an entrepreneur since it influences business effectiveness (Sanchez & Sahuquillo 2012, p.11498). The need for competition relates to the idea of competence or capacity to interact effectively with the surrounding environment. It involves an individual’s desire to apprehend the social and physical environment and henceforth learn the ways of acquiring the desired result from it. Theoretically, it is an internal locus of control that suggests an individual’s beliefs and behavior instead of random element, luck, or accidental lead to results. Consequently, the need for competition depends on the need for achievement since an internal locus of control causes an entrepreneur to have an idea that his behavior will affect the results (Sanchez & Sahuquillo 2012, p.11499). Main Problems in the New Venture During the early days of the venture, the company is small and highly informal with little formal processes and procedures. As the venture grows, it requires more professionalism and the use of formal coordination process (Raicaudhuri 2010 p.107). These ventures incur millions of dollars to establish, although they experience a number of problems both externally and internally during procurement of raw materials, manufacturing, marketing distribution, and availing incentives offered by the government (Charantimath 2011, p.78). Internal Problems Internal problems are the challenges that can be controlled by the management of the venture. The source of such issues is caused by the management’s failure to direct the firm`s operations properly. This can occur due to intrinsic weaknesses in the management itself or their failure to establish proper structures and processes within the company that facilitates effective controls (Chatterji & Hedges 2002, p.109). These include: Management deficiency or weakness: The new entrances in the entrepreneurship field do not necessitate prior training or education background in management. Due to the development of sophisticated and modernized market, it is a necessity that entrepreneurs employ modern market strategies. A large number of entrepreneurs in the market face a challenge of management because of lack of training and professionalism. In reality, though entrepreneurship might be inborn, it requires enhancement through training and application. Today, various universities and colleges in developed and developing nations are offering courses on the management of enterprises (Charantimath 2011, p.81). Scarce financial control: Financial inadequacy is a sign of management weakness. Finances are key hindrances to the establishment and growth of new ventures. In order to ensure that new ventures remain healthy throughout, financial management needs to be a constant issue. Profits planning should be ensured through periodical performance assessments. The importance of being conservative should be considered at all times. Appropriate use of assets is crucial for profit maximization. All the aspects of management add in a big or a small measure in venture’s growth and survival (Charantimath 2011, p.81). Business operation problems: Most new ventures experience manufacturing and technical challenges due to the lack of availability of inputs, shortage of skilled labor, capacity underutilization, and cost and time overruns. These problems arise right at the initial project stages of planning and preparation of technical feasibility report. The problems touch on areas such as pricing, tools selection, hiring of employees, technology to be adopted, and standard quality controls. Product planning: in most cases, technical knowledge and infrastructure determine the product selection. Most new ventures do not conduct product planning. Tools selection: when selecting machinery, plant, and equipment, detailed scrutiny is supposed to be conducted because quality tools result in increased efficiency and cost reduction. Most new ventures do not conduct detailed scrutiny before selecting their tools. Human resource development: Most entrepreneurs overlook this area. Selecting a right person for a task ensures smooth and productive working of the venture. After the right personnel are selected, it is very critical to give them in-house training, as well as both literature and on-job-training to enhance venture efficiency. Sometimes, entrepreneurs treat their employees like machines thus lowering their motivation. Today, various organizations like NITCON are willing to assist train employees of new ventures (Charantimath 2011, p.82). Technical skills: Most new ventures are neither equipped technically nor do they have technical competencies. Even though there are several ways of functioning, only one way is most effective and highly efficient. A good number of entrepreneurs ignore this fact and follow the trial and error method, which only wastes their resources, time, and energy. Today, many NGOs are helping businesses in the development and transfer of technology. Therefore, entrepreneurs should contact them for more support. Project Report preparation: numerous businesses do not prepare reports based on scientific lines, but prepare them to raise loans and investments. A business plan or a project report is essential because it gives the business a direction in terms of attaining its goals and objectives. Lack of a business plan makes a venture lose its focus and end up failing (Charantimath 2011, p.82). Other forms of internal problems include production and marketing glitches, which involve poor timing, poor product design, inadequate marketing strategies, lack of business stabilization, and overdependence on one customer. Financial difficulties include undercapitalization at initial stage, taking debt too early, and business capital relationship glitches. Managerial glitches involve two major aspects which are teamwork approach and human resources where poor selection of employees involves nepotism instead of qualification due to financial inadequacies, lack of professionalism, and poor relationships with partners (Kuratko 2013, p.183). Poor advertising and public relation skills, failure in developing and sustaining quality controls, lack of executive experience, insufficient organization support, and poor retention strategies fall under internal problems category (Raicaudhuri 2010 p.109). External Problems Occasionally, critical changes in economic or regulatory environment such as the 2008-2009 global economic recessions can influence the effectiveness of a new venture. The external factors that affect new ventures include interest rate fluctuation and exchange rate inflation, labor market and government regulations, and recession (Raicaudhuri 2010 p.109). Other external factors include infrastructure such as poor communication, lack of power, water, and bottleneck transport. Financial difficulties include lack of modern technology as well as competitive and unstable environment (Charantimath 2011, p.79). Governance Mechanism Runs in a New Venture In the last decade, corporate governance has been a major priority not only for local, but also for international policy makers as well as ventures wishing to attract more financiers. The corporate governance mechanism is a process that mainly focuses on preventing the agency problem that exists between self-centered managers and dispersed stockholders. The main governance problem of a new venture can be explained through agency relationship in a corporation where the managers are the agents and stockholders the principals. It would be complex if stockholders were to be involved in venture`s daily operations considering that they are only interested in share price level, dividend policy, and many may lack the skills to participate in strategic decision-making (McCahery & Vermeulen 2008, p.5). In their initial stage, new ventures of growth require finances from outside the business because capital generated is inadequate to sustain the start-up process. Nevertheless, the necessary start up for the venture and its projected growth until break-even is reached may differ greatly. There are several new ventures that record slow growth, which are self-financed by their founders. The founders do not require a legal form that enables external funding from the public. Nevertheless, a fast growing venture that is technologically advanced may need to create a legal platform that will enable raising large amounts of debt capital and equity from the public. This type of venture is preferred to be an incorporated company. In addition, high technological ventures attract little, but talented human capital. For instance, software engineers might find it hard to start up considering the competition of talent in large firms. In such a venture, the incorporated format in specific stock corporations permits founders to give potential employees the chance to contribute to the future of the venture through stock option schemes. Furthermore, innovative company’s founders with little management skills often have significant prerequisites for data and management counseling. In such a case, consultants on the supervisory and management board of incorporated companies, industry professionals, and public shareholders provide critical access to explicit know-how and network contacts within the venture’s industry (Volkmann, et al 2010, p. 170). There are two conditions that make investments incorporated in new ventures appear attractive and controllable for external investors. The first one is that the liability of financiers may be limited to their shares in the venture. In addition, a founder regards this limitation of liability as an attractive package. On the other hand, limiting one`s liability to legally require minimum share capital, which rarely will be achieved for founders because bank lenders will ask for guarantees or collateral. Additionally, external capital investors often expect founders to make considerable financial commitments to anticipate agency challenges. The second one is that from the external financier’s viewpoint and lenders to a new venture, incorporated legal platforms provides refined corporate governance mechanism to guard their interest and protect against prospect actions by founders managing the business. Nonetheless, it is important to note that managerial concerns may be less in the venture because contrary to managers, founders own shares in their ventures (Volkmann, et al 2010, p. 170) Fundamentally, apart from minimum capitalization requirement, there are considerable administrative and financial accounting procedures required by the law concerning transparent information right to external investors and stockholders of the new venture. Entirely, the law demands incorporated ventures to be more taxing; the higher prominence of incorporated companies may support the status of such formats (Volkmann, et al 2010, p. 171) . On the other hand, while these legal demands may enable acquisition of wealth and other resources by detailing consistency, certain potential challenges need consideration by the founders. Creating an incorporated venture rather than a small business like partnership will incur higher costs in terms of formation and administration. Additionally, these costs include opportunity cost in terms of assigning scarce time management to requirements such as preparing detailed financial accounts as per the requirements and registering by the registrar of companies. The preparation of detailed financial accounts may have a perceptible effect on the new administrative running costs because adhering to reporting standards of either Private or Public Limited Corporation may regularly necessitate external aid of an accountant or tax consultant. Furthermore, the governance mechanism enabling external investors to regulate and monitor the founders’ management may be a problem because it will lessen the speed of decision-making. The slowness may be hazardous to innovations, improve technologically driven initiatives, and establishing sufficient governance structure for the new business. Practically, in such ventures, there can be some leeway in designing an in-house individual governance structure. An example is a system with a resilient founder chief executive officer who ensures that all decisions are timely. Conversely, the probable opportunity for an active management and democratizing of governance structure relies on the corporation law of the venture`s home nation (Volkmann, et al 2010 p. 171). Conclusion Undoubtedly, a relationship exists between entrepreneurship and new business venture. An entrepreneur is a person who establishes a new business ventures. Even though in the entrepreneurship arena creation of a new venture is a separate and distinct phenomenon, the creation process is multidimensional since it involves interaction between an individual and his socio-economic environment. For entrepreneurs to be innovative in the industry today, they require good education and experience background. The effects are that a better expertise in the field is vital to the success of the venture. Conversely, starting a new venture can be risky and may result in the failure of the venture. Entrepreneurs undergo a number of problems when starting a successful venture. The challenges start with time pressure accompanied by a number of tasks to be carried out and financial or uncertainty risks. Raising money for a new venture seems to be the most complex problem of creating a new company. However, why is it a problem? The reason is that many entrepreneurs give little information about the opportunity to the financier, also referred to as information asymmetry and opportunity uncertainties or difficulties in determining future business prospects. Although they undergo these challenges during the start-up process, the main reasons why entrepreneurs venture into new businesses are financial, independence, and lifestyle motivations. Additionally, there is need for power, achievement, affiliation, and competition. These ventures require millions of dollars to establish, whereas entrepreneurs experience a number of problems. These problems can either be internal such as management weakness, financial inadequacies and all system problems due to management failure. External problems result from critical changes in economic or regulatory environment. External problems include interest and exchange rate inflation, labor market and government regulations, and recession. Finally, the corporate governance mechanism problems of a new venture can be explained through agency relationship in a corporation where the managers are the agents and stockholders. The two conditions that make investments for incorporated ventures attractive and controllable for external investors is that the liability of financiers may be limited to their shares and incorporated legal platforms provide refined corporate governance mechanism that guard investors’ interest against actions by founders managing the business. References List Barba-Sánchez, V &Atienza-Sahuquillo, C 2012, ‘Entrepreneurial behavior: Impact of motivation factors on decision to create a new venture’, African Journal of Business Management, vol. 5, no. 28, pp. 11497-11504. Baron, RA & Shane, S 2008, Entrepreneurship: A process perspective, Thomson/South- Western, Mason, OH Charantimath, PM 2011, Entrepreneurship Development and Small Business Enterprises: For ChaudharyCharan Singh University, Pearson. Chatterji, S & Hedges, P 2002, Loan workouts and debt for equity swaps: A framework for successful corporate rescues, Wiley, Chichester, UK Hmieleski, KM & Carr, JC 2008, ‘The relationship between entrepreneur psychological capital and new venture performance’, Frontiers of Entrepreneurship Research, 1-20 Kariv, D 2013, Female entrepreneurship and the new venture creation: An international overview, Routledge, New York Lussier, RN, Corman, J & Kimball, DC 2015, Entrepreneurial new venture skills, Routledge, London McCahery, J &Vermeulen, EM 2008, Corporate governance of non-listed companies, Oxford University Press, Oxford. Raichaudhuri, A 2011, Managing new ventures: Concepts and cases in entrepreneurship, PHI Learning Pvt. Ltd, New Delhi Sahay, A & Sharma, V 2009, Corporate governance of non-listed companies in emerging markets, Organisation for Economic Co-operation and Development, Paris Tang, J & Tang, Z 2007, ‘The relationship of achievement motivation and risk-taking propensity to new venture performance: a test of the moderating effect of entrepreneurial munificence’, International Journal of Entrepreneurship and Small Business, vol. 4, no. 4, p.24. Volkmann, CK, Tokarski, KO & Grünhagen, M 2010, Entrepreneurship in a European perspective: Concepts for the creation and growth of new ventures, Gabler, Wiesbaden Weber, S, Oser, F & Achtenhagen, F 2014, Becoming an entrepreneur, Springer, New York Read More