CIT480 Nabeel

• New-Venture Formation


  The number of new-venture start-ups has been consistently high at reports of more than 400,000 new firms in the United States every year since 2010
• Start-ups


  Small businesses with ambitions of growth
• Ideas for Potential New Businesses

  The U.S. Patent Office currently receives more than 500,000 patent applications per year
• Small businesses


  Locally owned businesses with a small number of employees, low-cost income with no plans to eventually become a corporation, usually 'sole traders' and low risk, low reward
• Fundamental difference between start-ups and small businesses is the mindset - start-ups come with a fairly high risk factor and could be a huge success or fail easily
• Sources of capital for entrepreneurs

  • Commercial loans
  • Public offerings
  • Private placement
  • Convertible debentures
  • Venture capital
  • Informal risk capital
• Debt financing

  Secured financing of a new venture that involves a payback of the funds plus a fee (interest) for the use of the money
• Equity financing

  Involves the sale (exchange) of some of the ownership interest in the venture in return for an unsecured investment in the firm
• Commercial banks

  • Make 1- to 5-year, intermediate-term loans secured by collateral (receivables, inventories, or other assets)
  • Questions in securing a loan: What do you plan to do with the money? How much do you need? When do you need it? How long will you need it? How will you repay the loan?
• Advantages of debt financing

  • No relinquishment of ownership is required
  • More borrowing allows for potentially greater return on equity
  • Low interest rates reduce the opportunity cost of borrowing
• Components of New-Venture Motivation

  • The need for approval
  • The need for independence
  • The need for personal development
  • Welfare (philanthropic) considerations
  • Perception of wealth
  • Tax reduction and indirect benefits
  • Following role models
• Disadvantages of debt financing

  • Regular (monthly) interest payments are required
  • Cash-flow problems can intensify because of payback responsibilities
  • Heavy use of debt can inhibit growth and development
• Public offerings (IPOs)


  "Going public" refers to a corporation's raising capital through the sale of its securities on the stock markets
• Advantages of IPOs


  • Size of capital amount
  • Liquidity
  • Value
  • Image
• Disadvantages of IPOs


  • Costs
  • Disclosure requirements
  • Shareholder pressure
• Crowdfunding


  Using the crowds to raise capital by connecting people with talents, ideas, and sellable products, with those that have the funds to invest their way, thus creating jobs, new business opportunities, and fueling the economy
• Principal parts of crowdfunding

  • The entrepreneur who proposes the idea and/or venture to be funded
  • The individual or groups who support the idea
  • A moderating organization (the "platform") that brings the parties together to launch the idea
• Forms of crowdfunding


  • Rewards Crowdfunding - The entrepreneur seeks a target amount of funding to launch a business concept without incurring debt or sacrificing equity and, in return for the donation, the entrepreneur provides some type of gift or incentive
  • Equity Crowdfunding - The entrepreneur shares equity in the venture, usually in its early stages, in exchange for the money pledged
• Potential concerns with crowdfunding

  • Reputation
  • Intellectual property (IP) protection
  • Donor dilution
  • Investor management
  • Public fear
• Benefits of crowdfunding


  • Funding while mostly keeping the equity
  • Profile
  • Marketing
  • Engagement
  • Feedback
• Crowdfunding models


  • Donation Model - People can donate money in small increments, to a project which they believe has moral and ethical value that is good for the community
  • Preorder Model - People make online pledges during a campaign or pre-buy the product for later delivery
  • Reward-Based Model - Investors get the satisfaction of helping and immediately receive a pre-determined award or item of value but no equity or ownership
  • Equity Model - Large amount of "regular" people investing small amounts to fund early start-ups, with the expectation to receive dividends or investment appreciation
• In the UAE, Dubai's Beehive launched a crowdfunding platform in Bahrain
• Some of the worst Kickstarter projects of all time
• Initial Public Offering (IPO)


  The very first time a company issues stock to the public
• Entrepreneurial Motivations


  • Personal characteristics
  • The environment
  • The venture
• Reasons companies go public

  • To raise money for growth
  • To allow employee, owners, or early investors to liquidize some other shares and make money
  • Future capital - Once public, firms have greater and easier access to capital in the future
  • Mergers and acquisitions - It's easier for other companies to notice and evaluate a public firm for potential synergies
• Though the number of IPOs are expected to surpass last year's in the UAE, the value is highly unlikely to cross 2019's figures in the foreseeable future due to Saudi Aramco's record fund-raising in the last quarter of 2019
• Venture capitalists


  Investors that provide funds for high-risk, start-up companies who do not have access to equities markets
• Well-known venture capitalists


  • Jim Breyer, an early Facebook investor
  • Peter Fenton, an investor in Twitter
  • Peter Theil, the co-founder of PayPal
  • Jeremy Levine, Facebook's first investor and the largest investor in Pinterest
  • Chris Sacca, an early investor in Twitter and ride-share company Uber
• What venture capitalists provide

  • Capital for start-ups and expansion
  • Market research and strategy
  • Management-consulting, audits, and evaluation
  • Contacts - customers, suppliers, and businesspeople
  • Assistance in negotiating technical agreements
  • Help in establishing management and accounting controls
  • Help in employee recruitment and employee agreements
  • Help in risk management and with insurance programs
  • Counseling and guidance in complying with government regulations
• Myths about venture capitalists

  • Venture capital firms want to own control of your company and tell you how to run the business
  • Venture capitalists are satisfied with a reasonable return on investments
  • Venture capitalists are quick to invest
  • Venture capitalists are interested in backing new ideas or high-technology inventions - management is a secondary consideration
  • Venture capitalists need only basic summary information before they make an investment
• Some of the top VC firms in the UAE

  • BECO Capital
  • Middle East Venture Partners (MEVP)
  • Global Ventures
  • Wamda Capital
  • Mubadala VC
  • Hub71
• Recent VC deals in the UAE in 2020

  • Kitopi, a UAE-based cloud kitchen platform, raised $60 million
  • Sellanycar.com, a UAE-based car marketplace, raised $35 million
  • Nana, a Saudi Arabia-based online grocery app, raised $18 million
• Successful Start-Up Characteristics


  • More aggressive in making their business real
  • Undertake more activities than others
  • Act with more intensity
  • Make use of professional advice
  • Developed more detailed business plans
  • Obtain legitimacy with early stakeholders
• The MENA region is fast emerging as a key startup ecosystem, having seen several recent exits including the $3bn acquisition of Careem by Uber in 2019 and Souq by Amazon in 2017. The region offers a young, highly connected market of more than 400m people with similar cultures and languages.
• Despite the impact of COVID-19, more than $659m was invested in MENA-based startups in the first half of 2020 – representing a staggering 95% of total venture investments in the previous year.
• Criteria for evaluating new-venture proposals

  • Timing of entry
  • Key success factor stability
  • Educational capability
  • Lead time
  • Competitive rivalry
  • Entry wedge imitation
  • Scope
  • Industry-related competence
• Factors in venture capitalists' evaluation process

  • Timing of entry: Pioneer - Enters a new industry first, Late follower - Enters an industry late in the industry's stage of development
• The Elements Affecting New-Venture Performance
• Venture capitalists' screening criteria

  • Must fit within lending guidelines of venture firm for stage and size of investment
  • Proposed business must be within geographic area of interest
  • Prefer proposals recommended by someone known to venture capitalist
  • Proposed industry must be kind of industry invested in by venture firm