SmallBusinessManagement

ProfessorHornadayLecture4SmallBusinessManagement

ProfSmallBusinessSourcesof

CommercialCreditCommercialBankLoans-36%CommercialBankMortgages-25%FinanceCompanies-23%VentureCapital-10%SBALoans-6%Source:SBA,1996SmallBusinessSourcesof

ComGoalsofGovernmentAssistanceEconomicGoalsIncreaseEconomicEfficiencyIncreaseEconomicGrowthProvideFinancingnotAvailablefromthePrivateSectorPoliticalGoalsProvideEmploymentIncreaseBusinessOwnershipNarrowIncomeGapProvideaForumforSmallFirmsGoalsofGovernmentAssistance1995SmallBusinessAdministration(SBA)LoanPrograms504DevelopmentLoans-$2,5007(a)LoanGuarantees-$7,700SBICSeedMoney-$375Source:SBA,1996($millions)1995SmallBusinessAdministraSBAGuaranteedLoansLenderofLastResortIndependentlyOwnedandOperatedNotDominantInFieldMax$500K,Average$175KSBAGuarantees85-90%ofLoanRequireCollateralandPersonalGuaranteesPrimeRate+2.75%for10-25YearsSource:SBA,1996SBAGuaranteedLoansLenderof1995SBAGovernmentLoansUsedbyLessthan1%ofSmallBusinesses55,600LoansGuaranteedValuedat$9BillionDefaultRateof19%1995SBAGovernmentLoansUsedRisksofBankLending50%ofU.S.Start-UpsGoneafter3yearsBanksUseDepositorFundsforLoansBanksnotVentureCapitalistsLackofBankIndustryandMarketExpertiseBankTransactionCostsRisksofBankLending50%ofU.The“5Cs”ofBankLendingCharacterCapacityCapitalCollateralConditionsThe“5Cs”ofBankLendingCharSmallBanksLendtoSmallBusinesses

Source:WSJ,1996%ofSmallBusinessLoansSmallBanksLendtoSmallBusiOutstandingLoansin1995LargeBanks-$71.9BillionSmallBanks-$212.3BillionsSource:SBA,1996OutstandingLoansin1995SourEarlyFinancingStages

NoRevenues,NoProfitsSeedExpansionLateStageHigherRiskLowerRiskConceptDevelopmentCommercializationEarlyFinancingStages

NoReveInflowsintoUSVentureCapitalFundsSource:TheEconomist,2000BillionsInflowsintoUSVentureCapita1995VentureCapitalSeedMoney

Source:BusinessWeek,1996$MillionsCommunicationsInformation&SoftwareDistributionProductsHealthCare1995VentureCapitalSeedMoneU.S.Start-UpVentureCapital

1stQuarter2000Source:WSJ,2000BillionsU.S.Start-UpVentureCapital

VentureCapitalandtheInternetSource:WSJ1999Billions

VentureCapitalandtheIntIrreducibleUncertaintyInvestmentBhidé’sInvestment-Uncertainty-ProfitDiagramNote:SizeofMoneyBag=PotentialProfitIrreducibleInvestmentBhidé’sIIrreducibleUncertaintyInvestmentPROMISINGSTART-UPS:MicrosoftBASICfortheAltair(1975)SamWaltonfranchisedvarietystore(1945)TRANSITIONALINITITATIVES:MicrosoftExcelfortheMacintosh(1985)Wal-Martdistributioncenters(1968-69)CORPORATEINITIATIVES:MicrosoftWindows95Wal-MartJVinMexico(1991)Bhidé’sInvestment-Uncertainty-ProfitDiagramNote:SizeofMoneyBag=PotentialProfitIrreducibleInvestmentPROMISINGIrreducibleUncertaintyInvestmentDistributionofSignificantInitiativesOpportunisticAdaptationRisktransfer/syndicationPersonalabilitiesResearchandplanningUnderwritingotherrisksTeamworkNote:SizeofMoneyBag=PotentialProfitCORPORATEINITIATIVESPROMISINGSTART-UPSIrreducibleInvestmentDistributIrreducibleUncertaintyInvestmentFiveArchetypalInitiativesMARGINALBUSINESSESLawncare,hairsalonPROMISINGSTART-UPSHewlett-Packard(1948)EDS(1962)VC-BACKEDSTART-UPSIntel,Lotus,Compaq,Staples,GenentechCORPORATEINITIATIVESWindows95,Pentium(Intel),MachIII(Gillette),Prozac(Lilly)REVOLUTIONARYVENTURES:FederalExpress,Iridium(Motorola)Note:SizeofMoneyBag=PotentialProfitProfessionalManagementMajorOutsideFinancingIrreducibleInvestmentFiveArchIrreducibleUncertaintyInvestmentStagesofFunding2ndSTAGEVCCisco(1987)BOOTSTRAPPEDSTART-UPSCisco(1984)VC-BACKEDSTART-UPSCompaq(1982)PUBLICMARKETSCisco(1990)Compaq(1983)Note:SizeofMoneyBag=PotentialProfitProfessionalManagementMajorOutsideFinancingIrreducibleInvestmentStagesofIncrementalGoalsFirmSizeandMaturityGoals-AudaciousorIncrementalAudaciousGoalsPROMISINGSTART-UPSSurvivalCashFlowTRANSITIONALINITITATIVESJustifyInvestmentSecureResourcesPromoteCooperationCORPORATEINITIATIVESLimitedbyHistoryandSizeIncrementalFirmSizeandMaturFormalPlanningFirmSizeandMaturityOpportunisticAdaptationorFormalPlanningOpportunisticAdaptationPROMISINGSTART-UPSExperimentationUnexpectedSituationsLimitedPlanningResourcesTRANSITIONALINITITATIVESJustifyInvestmenttoOutsidersCORPORATEINITIATIVESSystematicResearchPlanningResourcesCompeteforCorporateFundingFormalFirmSizeandMaturityOpFirmSizeandMaturityRisksFacedbyTopDecision-MakersPersonalRiskPROMISINGSTART-UPSLowInitialCapitalFounder’sTimeFounder’sReputationTRANSITIONALINITITATIVESFounder’sEquityPersonalGuaranteesCORPORATEINITIATIVESCorporateRiskOnlyOneCEODecisionofManyFirmSizeandMaturityRisksFaSmallBusinessManagement

ProfessorHornadayLecture4SmallBusinessManagement

ProfSmallBusinessSourcesof

CommercialCreditCommercialBankLoans-36%CommercialBankMortgages-25%FinanceCompanies-23%VentureCapital-10%SBALoans-6%Source:SBA,1996SmallBusinessSourcesof

ComGoalsofGovernmentAssistanceEconomicGoalsIncreaseEconomicEfficiencyIncreaseEconomicGrowthProvideFinancingnotAvailablefromthePrivateSectorPoliticalGoalsProvideEmploymentIncreaseBusinessOwnershipNarrowIncomeGapProvideaForumforSmallFirmsGoalsofGovernmentAssistance1995SmallBusinessAdministration(SBA)LoanPrograms504DevelopmentLoans-$2,5007(a)LoanGuarantees-$7,700SBICSeedMoney-$375Source:SBA,1996($millions)1995SmallBusinessAdministraSBAGuaranteedLoansLenderofLastResortIndependentlyOwnedandOperatedNotDominantInFieldMax$500K,Average$175KSBAGuarantees85-90%ofLoanRequireCollateralandPersonalGuaranteesPrimeRate+2.75%for10-25YearsSource:SBA,1996SBAGuaranteedLoansLenderof1995SBAGovernmentLoansUsedbyLessthan1%ofSmallBusinesses55,600LoansGuaranteedValuedat$9BillionDefaultRateof19%1995SBAGovernmentLoansUsedRisksofBankLending50%ofU.S.Start-UpsGoneafter3yearsBanksUseDepositorFundsforLoansBanksnotVentureCapitalistsLackofBankIndustryandMarketExpertiseBankTransactionCostsRisksofBankLending50%ofU.The“5Cs”ofBankLendingCharacterCapacityCapitalCollateralConditionsThe“5Cs”ofBankLendingCharSmallBanksLendtoSmallBusinesses

Source:WSJ,1996%ofSmallBusinessLoansSmallBanksLendtoSmallBusiOutstandingLoansin1995LargeBanks-$71.9BillionSmallBanks-$212.3BillionsSource:SBA,1996OutstandingLoansin1995SourEarlyFinancingStages

NoRevenues,NoProfitsSeedExpansionLateStageHigherRiskLowerRiskConceptDevelopmentCommercializationEarlyFinancingStages

NoReveInflowsintoUSVentureCapitalFundsSource:TheEconomist,2000BillionsInflowsintoUSVentureCapita1995VentureCapitalSeedMoney

Source:BusinessWeek,1996$MillionsCommunicationsInformation&SoftwareDistributionProductsHealthCare1995VentureCapitalSeedMoneU.S.Start-UpVentureCapital

1stQuarter2000Source:WSJ,2000BillionsU.S.Start-UpVentureCapital

VentureCapitalandtheInternetSource:WSJ1999Billions

VentureCapitalandtheIntIrreducibleUncertaintyInvestmentBhidé’sInvestment-Uncertainty-ProfitDiagramNote:SizeofMoneyBag=PotentialProfitIrreducibleInvestmentBhidé’sIIrreducibleUncertaintyInvestmentPROMISINGSTART-UPS:MicrosoftBASICfortheAltair(1975)SamWaltonfranchisedvarietystore(1945)TRANSITIONALINITITATIVES:MicrosoftExcelfortheMacintosh(1985)Wal-Martdistributioncenters(1968-69)CORPORATEINITIATIVES:MicrosoftWindows95Wal-MartJVinMexico(1991)Bhidé’sInvestment-Uncertainty-ProfitDiagramNote:SizeofMoneyBag=PotentialProfitIrreducibleInvestmentPROMISINGIrreducibleUncertaintyInvestmentDistributionofSignificantInitiativesOpportunisticAdaptationRisktransfer/syndicationPersonalabilitiesResearchandplanningUnderwritingotherrisksTeamworkNote:SizeofMoneyBag=PotentialProfitCORPORATEINITIATIVESPROMISINGSTART-UPSIrreducibleInvestmentDistributIrreducibleUncertaintyInvestmentFiveArchetypalInitiativesMARGINALBUSINESSESLawncare,hairsalonPROMISINGSTART-UPSHewlett-Packard(1948)EDS(1962)VC-BACKEDSTART-UPSIntel,Lotus,Compaq,Staples,GenentechCORPORATEINITIATIVESWindows95,Pentium(Intel),MachIII(Gillette),Prozac(Lilly)REVOLUTIONARYVENTURES:FederalExpress,Iridium(Motorola)Note:SizeofMoneyBag=PotentialProfitProfessionalManagementMajorOutsideFinancingIrreducibleInvestmentFiveArchIrreducibleUncertaintyInvestmentStagesofFunding2ndSTAGEVCCisco(1987)BOOTSTRAPPEDSTART-UPSCisco(1984)VC-BACKEDSTART-UPSCompaq(1982)PUBLICMARKETSCisco(1990)Compaq(1983)Note:SizeofMoneyBag=PotentialProfitProfessionalManagementMajorOutsideFinancingIrreduc