1. Franchising, Angel Financing and Venture Capital
A. “How Franchising Works”
(Summary) Franchising may be thought of as paying someone for the use of his or her name and business strategy. That is, establishing a relationship with a successful business to use its proven systems and capitalize on its existing brand awareness in order to get a quicker return on investment. The advantages of franchising are reduce risk and instant recognition. Risk is reduced since the franchisee can take advantage of the franchisors managerial know-how. Furthermore, the franchisee can get better deals on supplies because the franchise company can buy them in bulk for the entire chain and pass the savings to the franchise units. Instant recognition is also a big advantage since customers are more likely to choose a known brand over an unknown brand. Together, these two advantages, typically results to franchises getting up and running, and profitable faster. However, in exchange, franchisees must abide by the franchisor's rules. That is, it is required to pay fees, observe restrictive covenants and keep trade secrets. The fees may include: 1) the up-front entry fee or franchise fee, which is solely for the right to use the name and system, 2) the royalty fee, usually a percentage of sales, and 3) advertising funds, which is paid periodically for national and regional promotions. Restrictive covenants may include in-term or post-term non-competition covenants, which would restrict the franchisee from operating a similar business during or even after the franchise agreement. To select a franchise, it is important for the prospective franchisee to think about the work environment he or she is interested in, and the requirements of running the business. It is important for the franchisee to know his or her objectives. It is helpful to visit franchising web sites or consult franchising professionals to narrow down the choices. Then, one could begin contacting short-listed franchisors for more information. It is crucial to thoroughly and systematically evaluate potential franchisors before making a decision. It is also important to visit many existing franchisees and listen to their feedback. Then, a prospective franchisee must review the franchisor's business plan, operations manuals and market analysis. He or she should make it a point to meet with the franchisor and the franchising operations personnel with whom he or she will be dealing with and take careful notes. Aside from reviewing the franchisor's business plan, the franchisee must create his or her own business plan. This will be necessary when securing a business loan. To create a satisfactory business plan, it is required to conduct market research and come up with estimates and projections. It can also be beneficial to get legal advice on the franchise deal. The franchisee must also not fail to consider the franchisor's policies on renewal and transfer of ownership when considering a franchise deal.
(Reaction) Franchising is good for individuals who want to go into business, have the funds to do so but are not particularly entrepreneurial. Franchising provides such individuals with a fully-formed business, established systems and a potentially good source of income. However, franchising is not for entrepreneurs since franchising agreements would limit or even restrict the entrepreneur from innovating. Furthermore, franchising will not provide the type of management control that entrepreneurs seek (since after all in franchising, the business is not really owned by the franchisee).
B. “Educating Entrepreneurs on Angel and Venture Capital Financing Options”
(Summary) Entrepreneurs have several options available when it comes to financing their ventures. It is important for the entrepreneur to understand the types of potential investors and their criteria for determining an investment in order to attract the appropriate match. He must make the distinction between angel investors and venture capitalist investors. Angel investors play a critical role in early-stage finance. They are typically high net-worth individuals (who usually want to remain anonymous) willing to take on higher-risks in exchange for proportionately high returns. In contrast, venture capitalists prefer investing in later-stage businesses as it is more efficient for them to make few large investments than many small ones. They also tend to avoid high-risk investments. In view of this, angel and venture capital investors may be thought of as belonging to opposite ends of the business stage and risk preference continuum. Understanding the difference between angel and venture capital investors will allow the entrepreneur to use his or her time more efficiently and prepare the appropriate materials. Angel investors typically invest their own funds while venture capital investors invest pooled funds of others (including intuitional investors) that they manage. On one hand, some angel investors are business owners themselves and look for entrepreneurial experience (i.e. seeks to participate in the business) when considering investments (which is why they could add value to the venture they invest on). On the other hand, some angel investors are not very “financially sophisticated” and make investment decisions based solely on trust or relationship with little or no due diligence. Contrary to this, venture capital investors are very systematic and have very specific requirements. They evaluate the entrepreneur, the management team, the product potential, the market potential and the business plan. A third category of investors that fall between angel and venture capital investors are the so-called venture angels. Venture angels invest private money greater than angel investors but far less than major venture funds, and typically, their portfolio are run by professional management. The final category is angel networks. Angel networks intend to introduce individuals with money to individuals in need of money. Angel networks with sufficient members can rival venture capital firms in terms of both financial sophistication and investment capability. In general, angel investors prefer personal introduction rather than receiving an unsolicited business plan. Venture capital investors can also be identified through similar referral network. A venture with existing angel investors has a higher chance of attracting venture capital investors. Another means of identifying both angel and venture capital investors is through the internet.
(Reaction) Angel networks appear to be a good source not only of funding but also of know-how for entrepreneurial ventures in that they retain both the appetite for risk and desire for entrepreneurial experience that characterize sophisticated individual angel investors while having the financial resources to match what venture capital investors can offer. The collective know-how of a group of angel investors would definitely add value to a new venture (esp. in terms of general management and direction).
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