Equity Source Of Finance

Published Date: 02 Nov 2017

INTRODUCTION

This piece of work is aimed at describing the source of finance an entrepreneur can use for a business start-up, as well as highlighting the pains and gains of the source of finance. However, for a successful launch of a business, a plan has to be mapped out to give directions to the entrepreneur on how to successfully launch a new venture. The first section highlights the source of equity finance and the pains and gains related to the source of finance, while the second section details the essential elements of a business plan that Alpha personal care system will use to secure funds from its investors.

DEFINITION OF EQUITY SOURCE OF FINANCE

Equity finance represents the personal investment of the owner (or owners) in a business which could also be referred to as Risk capital; this is because the investors undertake the primary risk of losing their funds if the business fails. In addition to this definition, Equity finance can also be described as the act of raising funds for business activities by selling a common stock to an individual. To recoup the funds invested, shareholders receive ownership interests in the business. However, if the venture succeeds, the founders and investors share in the benefits which are usually substantial. For example, the early investors in Microsoft, and Yahoo became millionaires when the companies went public and the return on investments paid off. (Zimmerer, 2008). One of the primary and unique sources of funding small firms through equity finance is the Venture capital. In recent years, the venture capital industry has engaged in an expanded financial role, assisting in a wide range of business activities. There are certain features which will categorize a venture capitalist. One of such feature is that it involves a long term investment discipline in which the venture capitalist usually must wait within 5 – 10 years of investment for significant returns. Venture capitalist seek to focus on entrepreneurial businesses with High growth and high profit potential and which are managed by experienced and ambitious teams who are capable of turning their business plan to reality.

ADVANTAGES AND DISADVANTAGES OF VENTURE CAPITAL

Venture capital contributes significantly to the professionalization and growth of young innovative start-ups in so many ways. They add value to the firms by establishing networks; assist a firm in forming strategic alliances and giving strategic business advice and helps in the commercialization of young firms. They carry out these by providing funds to entrepreneurs and managerial support to commercialize their ideas. For instance, once a venture capitalist join a firm, the probability of introducing the new product into the market increases therefore, rapid market introduction is strategically important because the firm gains a first mover advantage. Alpha personal care system with their business idea needs adequate funding to effectively exploit their business concept, hence their need to secure funds externally. Again, the venture capitalist will provide Alpha personal care system managerial assistance such as access to consultants, investment bankers and so on and build networks for the firm (Hellman and Puri, 2000). Similarly, due to certain factors faced by new start-ups such as liabilities of smallness and newness, and high information asymmetry, venture capital firms with their capabilities help firms to overcome these factors and contribute to the management of start-ups. Alpha personal care system does not have track records or experience in the new product concept, the venture capitalist will help the firm overcome these factors. Moreover, the background and experience of a venture capitalist mean that they have access to richer information which can equip the entrepreneurs with a vast knowledge of the business. As a result of the credibility and the reputation of a venture capitalist resulting from the information available to the VC, these will give a strong signal to the quality of a new start-up. In a market with high uncertainty, building the quality of a start-up through a venture capitalist’s credibility is very important as this will help reduce perceived risk, and facilitate the implementation of their growth plans. A strong brand image for Alpha personal care system is significant for the firm because this will help them survive the competitive market and reduce the risks they will likely encounter (Gorman and Sahlman, 1989). Lastly, venture capitalist through the establishment of young start-ups into the market helps create jobs and it can be seen as a source of innovation. New firm creation helps create employment for individuals and through the use of R&D activities, these however leads to innovation because of the quality of goods and services produced. In the Alpha personal care system, through the use of technology and the investment in Research and development, this as a result brings about innovation and it also creates new jobs for individual in the market environment (Gompers, P. 1996). Despite the benefits gained from the use of venture capitalist, firms also encounter adverse effects which discourage them in sourcing for funds through equity. A major effect is the ownership and control over the new firms. Most venture capitalist seeks to purchase 20 – 40 percent of a business, or in some cases, a venture capitalist may buy 70 percent or more of a company’s stock leaving its founders with minority share of ownership. In other words, the venture capitalist takes an active role in managing the firm. Using the venture capitalist as a source of finance for Alpha personal care systems may lead to conflict and eventually dissolve the firm in terms of who will obtain the greatest share of the business because the firm is a partnership business whereby 2 entrepreneurs shared their resources and overheads together to establish the firm (Hellman, 1998). The next point argues on the fact that in venture capitalist, the entrepreneur can be replaced by an external professional CEO if he lacks the managerial abilities to achieve rapid growth. These however may disrupt the efficient run of Alpha personal care system in terms of making strategic decisions as to which players to license its technology and in what ratio in terms of the revenue the firm will earn. Conversely, venture capitalists are most times selective in allocating their resources, they tend to focus their investment into the latest web technological niches such as software, biotechnology, and telecommunications which make it difficult for start-ups qualify for an investment.

PART 2: ESSENTIAL ELEMENTS OF A BUSINESS PLAN

BRIEF INTRODUCTION OF A BUSINESS PLAN

Business plans are perceived to be an important management tool for new ventures. It is well known that external capital providers such as venture capitalists and angel investors demand business plans. However, the business plan serves as a road map to develop new start-ups and also a tool used to signal potential buyers that the contents are worth their attention, and signals to potential investors and employees that the nascent business is bonafide and worth their consideration. Though, there is really no one right way to prepare a business plan, but a plan which can guarantee success in a venture capital will enhance the chances of a positive outcome. I will therefore outline below the essential elements of a business plan that will secure investors for Alpha personal care system.

VISION AND MISSION STATEMENT.

The vision should stress what the owner ultimately envisages the business to be in terms of growth, value creation and so much more. The vision statement serves as a ticket to the firm’s success. Once the vision has been defined, a firm can develop strategies for moving the organization towards that vision. However, to achieve a vision statement, a firm develops its mission. It describes why the firm exists and what benefits it has to offer its potential customers. For example, Starbucks offer a lot more than coffee; in addition it offers an affordable luxury. In Alpha personal care system, there was a problem set out to solve. The entrepreneurs highlighted the problems of wet toothbrushes and a need for patient to change their toothbrushes far more regularly. Hence their vision can state thus "Bringing convenience to customers by developing a better looking toothbrush at an affordable price which enhances a great hygiene".

ENTREPRENEUR/MANAGEMENT TEAM

The quality of management is the most important factor considered by investors. It is essential to describe the management team and their role and commitment to the business and ensure that this team possesses the required skills for the business. For alpha personal care system to earn an investment, they need to provide an organization chart which clearly delineates the responsibilities of the managers. It should also state the previous experiences the managers have. Both entrepreneurs in Alpha personal system both have had significant work experience in fields of packaging design, marketing, and advertising activities. The entrepreneurs experience in packaging design gives him an insight of how the product concept will be stylishly packaged at a low cost, while the marketing and advertising experience will help achieve the actual marketing strategy that will be used to reach the potential market.

PRODUCT OR SERVICE DESCRIPTION

An entrepreneur should describe the company’s overall product line by giving an overview of how customers use its goods or services. The unique characteristics of the company’s product or service and the benefits that the customers would get from purchasing its product should be emphasized. However, it should not just entail describing the product but it is best to state the features of the product that will bring value for the customer. For example in the case of Alpha Personal care system, the basic features of the product highlighted were retainable handle with disposable heads, double locking connectors which creates a benefit to the target customer which enables the target audience (Patients) change their wet toothbrushes more often. (Zimmerer, 2008). Conversely, an entrepreneur should have a value proposition on its product. Value proposition is a powerful tool used by marketers to differentiate oneself in the market place and helps a firm refine its competitive positioning. For example, Amazon’s value proposition is based on low cost prices on its product. In the case of Alpha personal care system, its value proposition stresses on providing a better looking unique product which will still be kept at a low price. Furthermore, an investor will need to know if the technological characteristics and design of the product are more advanced than its competitors and if they satisfy the customers’ expectation. Similarly, entrepreneurs should include a summary of any patents, trademarks or copyrights to enable them protect the product from infringement by competitors. A patent is a grant from the federal government’s patent and trademark office to the inventor of a product, giving the exclusive right to make, use or sell the invention in this country for 20 years from the date of filing the patent application. It gives the right to exclude others from making, using or selling an invention. In the case of Alpha personal care system, the product concept was patented and even after obtaining a proper legal protection through patents, copyrights or trademarks, entrepreneurs must also monitor the market for unauthorized imitators. (Zimmerer, 2008).

BUSINESS STRATEGY.

A company builds its competitive edge on its core competencies, which are unique set of capabilities that a company develops in key operational areas such as innovation, quality, service and so on which allows it out shine their competitors. Entrepreneurs must be able to identify those things that it does best at the same time, building a strategy around a company’s core competencies allows it to gain a sustainable competitive advantage. Recently, there has been a conceptualization of a firm’s business model which can be used to achieve its competitive advantage. A firm’s means of survival in the market is to ensure its product/service possess a type of architectural design that will create value and capture to its customers. Conversely, the business model should explain how a company generates income or earns money by doing so; the entrepreneur must make key decisions regarding competitive positioning, market differentiation and aggressiveness of growth as each relates to the firm’s core value proposition. Determining the form of growth involves decisions regarding whether the firm is going to develop exclusively under its own sponsorships or through interaction with others in the form of franchising, partnership, strategic alliances, joint ventures, and licensing. (Peng and Heath 1996). Alpha personal care system with its product design such as disposable head, retainable handle and double connectors tends to create value to its targeted customers which ensures hygiene protection at an affordable price. To achieve the growth of Alpha personal care system, the firm sets to position its product concept by licensing the technology to dentists who possess larger market share in the Canadian market and who have greater marketing and distribution resources.

COMPETITIVE ADVANTAGE.

This section defines the competitive landscape of a business and to gain investment from investors. They will need to know who the firm’s competitors are (Direct or Indirect) and find out if the firm is able to assess their competitors’ strengths and weaknesses to enable the firm delineate its competitive advantages. Competitive advantage is the realization of superior performance through differentiation to create distinctive product appeal or brand identity; through offering customer value and achieving the lowest delivery cost or by focusing on narrowly scoped product categories or market niches so as to be viewed as a leading specialist. The three generic strategies identified by Michael porter include cost leadership, differentiation and focus. A cost leadership strategy focuses on low cost and prices. An example of a cost leader is Walmart and they are able to charge lower prices and make better profits. Differentiation strategy focuses on how to deliver products that customers view as valuable and different. An example is the Lexus car as compared to a Chrysler. Customers are willing to pay more to get a lexus because it possesses unique attributes, sophistication and quality. A focus strategy serves the need of a particular niche of an industry. An example is the Bentley and Lamborghini. Conversely, firms may become stuck in the middle if they fail to adopt any of the 3 strategies thereby earning no competitive advantage. Alpha personal care system developed a better looking device with unique features and at the same time focusing on a low cost strategy which will enable them have an advantage over their competitors.

MARKET SEGMENTATION (IDENTIFYING YOUR CUSTOMER)

A major and first step to develop an effective marketing plan is to identify a firm’s target market. The target market explains the specific group of customers in which the firm aims at. In identifying a target market however, the market could be grouped into smaller segments based on various factors such as the demographic, geographic, and behavioral factor which is termed as Market segmentation. By doing so, firms will better understand their target audience and make their marketing more effective. Marketers should inquire on certain research about the customer such as finding out where the customers are located I.e do they tend to be concentrated in one geographic region, what characteristics does the customer possess in terms of age, education levels, gender, and many more and what drives these customers’ buying behavior- what values are most important to them?. Conversely, investors are interested in how the firm will determine which segments to target for its marketing activities and in what order, and also determine how the firm will create a meaningful and competitively distinctive position in the minds of the targeted customers. (Marian Burkwood). Alpha systems care tends to focus on the geographic area of their customers in terms of the Canadian and US markets where the dentists are more concentrated.

MARKET SIZE, GROWTH AND PROFITABILITY.

It is vital to scrutinize the growth of a market to enable the firm estimate the future of the business. A firm should be able to estimate both revenue and sales volume for the next 3-5years. Market growth is inclined by trends which can either be demographic, technological, economic and environmental. These trends can seriously affect the sales growth of a firm’s product as well as the customer’s consumer habits. Furthermore, a firm should determine whether a market is profitable by examining its barriers to entry. If there is a high barrier to entry, this means that the incumbent firm is enjoying some advantages in the market which is attracting the potential entrants and the ability to use a high barrier will stop the potential entrants from operating in the market.

MARKETING STRATEGY.

The marketing goals of a firm include satisfaction of customer needs and the attainment of a competitive advantage. To achieve an effective marketing strategy, a combination of ingredients are used which is known as the marketing mix. The 4P’s include: Product, Price, Promotion and Place.

Product

The product is the key element of any marketing mix and it is the starting point of all marketing activities. A product go through various stages of development which allows managers make decisions about the continuous sale of a product, when to introduce additional lines and when to introduce changes to an existing product. Managers need to make certain decisions concerning the development of a product. Such decision includes; its design, which is very vital because it is directly linked to a firm’s success. Alpha personal care system can meet its customers’ needs by designing the product that will provide an aesthetic appeal and ergonomics function, they will also need to technologically develop the product to enable them differentiate their product as it is perceived that there are similar products in the market (Kotler Philip).

Price.

This is the amount of money for which something is offered for sale. Again, the price a firm sets for its product and service must strike a balance between gaining acceptance with the target market and making a profit for the firm. There are various decisions related to a price mix. Firms use various price mix strategies based on the aims and objectives of the firm. Using a penetration pricing strategy implies that the price of the product is comparatively low to similar goods and this is usually achieved in competitive markets where firms try to win customers over from their rivals. In the case of Alpha personal care system, to gain an increase in the market share, they need to penetrate the market by offering to its customers low cost on its products, this is because there are a number of similar products in the market and the market is highly competitive (Perfect Competition). Again, the barrier of entry to the market is relatively low and if they are not able to grow and survive in the market, potential entrants may kick the firm out of the market (Davenport and Jeane 2007).

Promotion.

This is a way of communicating to the target audience. It provides information that will assist them in making a decision to purchase a product or service. There are four elements of promotion which includes Public relations, Advertising, Promotion, and Packaging (Personal selling). It is also a way of increasing and maintaining awareness of a firm’s offerings to its customers. Firms maintain different types of promotion strategy decisions to distinguish from competitors and gain an advantage. Alpha personal care system could create awareness for its target market by constantly being innovative and creative in its product. In addition, advertising is an important way of communication no matter how unique a product is, it helps to create awareness and transmit information in order to gain customers from the target market.

Place.

This refers to how a firm will distribute its product or service to the end user. A firm must channel the product to the end user at the right place and the right time. All four variables of marketing mix are interconnected. By increasing the price of the product, it will lead to a lower demand of the product and there will be reduced channels for distribution. On the other hand, developing a quality brand image may lead to better pricing for a product. Finally, the overall marketing mix can result in dynamic modeling based on customer feedback for improving a product. In relation to the case study, Alpha personal care system should focus on offering its products to the end user by licensing out its technology to a larger player in the target market that has complementary distribution intelligence. it is however important for Alpha personal care system to have a knowledge of its potential licensee, by so doing, this will enable them develop its proposal with convincing explanations of the benefits of the invention which may in the same vein lead to improvement upon the invention and increased profits from licensing its technology. Again, due to high cost of manufacture and the comparatively small investment of a licensing program, most of the risks that a firm would otherwise incur in exploiting its intellectual property are transferred to the licensee.

FINANCIAL PLAN.

Financial plan is an essential tool that entrepreneurs use to manage their businesses more effectively and if they fail to develop workable strategies for earning a profit within a reasonable time, eventually they will suffer the ultimate business penalty. Furthermore, to enable entrepreneurs plan for their profits, there are some practical tools which will be used to help them anticipate changes and plot appropriate profit strategy to enable them carry on in the business. These tools include; Balance sheet statement, Income statement, Statement of cash flows, Proforma financial statements and Break even analysis. The entrepreneurs make use of the financial statements to understand the financial conditions of their companies. (Burns, 2011)

CONCLUSION.

In the bid to develop a marketing and financial plan that will attract investors for Alpha Personal care systems, various essential elements were highlighted to secure investment for Alpha personal care system. These elements includes examining the management team and the experience which is essential for a successful leadership, assessing the product description which will enable them earn a competitive advantage and the marketing strategies that should be used to enable them achieve a profitable and attractive market. Furthermore, the basic financial tools were highlighted which can help the company plan for profit. I will recommend that Alpha personal care system should formulate a strategic direction from the very beginning of the business and show how the future business will be carried out, long term perspective should be developed because it is wise to know what they want to achieve in the future at the very beginning. In other words, the company should develop its vision and define its business purpose only when this is done, the company will proceed to formulate its strategic and operative goals.

Furthermore, I will also recommend that Alpha personal care system should raise funds through a venture capitalist since the funds required is $50,000 and also the business idea is innovative, hence the venture capitalist will contribute significantly in the realization of the business idea. Again, they should ensure that the technological characteristics and features of the product should be more advanced because there are a number of similar products in the market, by so doing, they will be able to gain a market position and obtain as much revenue from the licensee after which an exit strategy should be formulated to enable the investor gain the rate of returns for their investment.