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Entrepreneurship

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Entrepreneurship ­ MGT602
VU
Lesson 35
SOURCES OF CAPITAL
LEARNING OBJECTIVES
1. To identify the types of financing available.
2. To understand the aspects of research and development limited partnerships.
3. To discuss government grants, particularly small business innovation research grants
RESEARCH AND DEVELOPMENT LIMITED PARTNERSHIPS
This method of financing provides funds from inventors looking for tax shelters. A typical R&D
partnership arrangement is established with a sponsoring company developing the technology with funds
being provided by a limited partnership of individual investors. Research and development limited
partnerships are particularly good when the project involves a high degree of risk or significant expense.
Major Elements
The three components are the contract, the sponsoring company, and the limited partnership. The contract
specifies the agreement between the sponsoring company and the limited partnership. The sponsoring
company does not guarantee results, but performs work on a best-effort basis. The typical contract
specifies that the liability for any loss be borne by the limited partners. There are some tax advantages for
both the partnership and the company.
This tax deduction is based on two authorizations:
1. Section 174 of the Internal Revenue Code.
2. The Snow vs. Commissioner case of 1974.
Limited partners may deduct their investments in the R& D contract under Section 174 in the year their
investments are made, significantly increasing the rate of return of the investment. The second component
is the limited partners. The limited partners have limited liability but are not a taxable entity. Any tax
benefits of the losses are passed directly to the limited partners. When the technology is successfully
developed, the partners share in the profits. The sponsoring company acts as the general partner developing
the technology. The sponsoring company usually has the base technology but needs to secure partners for
commercial success. The company usually retains the rights to use this technology to develop other
products.
Procedure
In the funding stage, a contract is established and the money invested for the proposed R&D effort. In the
development stage, the company performs the actual research, using the funds of the limited partners. If the
technology is successfully developed, the exit stage begins, with both parties reaping the benefits. In the
typical agreement, the sponsoring company and limited partners form a new jointly owned corporation. An
alternative is a royalty partnership in which a royalty based on the sale of the products is paid by the
company to the limited partnership. The company and limited partners may form a joint venture to
manufacture and market the product.
Benefits and Costs
Benefits
R&D limited partnerships provide the needed funds with a minimum of equity dilution while
reducing the risks.
The sponsoring company's financial statements are strengthened.
Costs
There is considerable time and money involved.
Most R&D limited partnerships are unsuccessful.
The restrictions placed on the technology may be substantial.
The exit from the partnership may be too complex.
Examples
Successful R&D limited partnerships include Syntex Corporation, Genetech, and Trilogy Limited.
R&D limited partnerships offer one alternative to funding technological development.
GOVERNMENT GRANTS
The Small Business Innovation Research (SBIR) grant program helps entrepreneurs obtain federal
grant money to develop an innovative idea. The act requires all federal agencies to share a portion of the
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Entrepreneurship ­ MGT602
VU
R&D funds with small businesses. This provides a uniform method of soliciting, evaluating, and selecting
research proposals. Eleven agencies are involved in the program. Small businesses submit proposals directly
to each agency. The agencies evaluate each proposal on a competitive basis and make awards.
The SBIR grant program has three phases.
Phase I awards are up to $50,000 for six months of feasibility-related experimental or theoretical research.
Phase II is the principal R&D effort. Phase II awards are up to $500,000 for 24 months of further
research and development. The money is to be used to develop prototype products.
In Phase III funds from other sources, such as the private sector or regular government contracts, are
needed to commercialize the developed technologies.
Procedure
The agencies publish solicitations describing the areas of research they will fund. The second step is
submission of the proposal by a company or individual. Each agency screens the proposals it receives, and
those passing are evaluated by experts. Awards are granted to those projects that have the best potential for
commercialization. Any patent rights, research data, and software generated are owned by the company,
not the government. The SBIR grant program is one alternative for a technically based entrepreneurial
company that is independently owned and operated and employs 500 or fewer individuals.
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Table of Contents:
  1. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:DEFINITION OF ENTREPRENEUR
  2. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:Possibility of New Venture Formation
  3. ENTREPRENEURIAL PROCESS/START UPS:GOVERNMENT AS AN INNOVATOR
  4. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND:ENTREPRENEURIAL PROCESS
  5. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…)
  6. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):CLIMATE FOR ENTREPRENEURSHIP
  7. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):PROBLEMS AND SUCCESSFUL EFFORTS
  8. THE INDIVIDUAL ENTREPRENEUR:ENTREPRENEURIAL BACKGROUND AND CHARACTERISTICS
  9. THE INDIVIDUAL ENTREPRENEUR (continued…):Personal Values, Work History, MOTIVATION
  10. THE INDIVIDUAL ENTREPRENEUR (continued…):ROLE MODELS AND SUPPORT SYSTEMS
  11. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES:INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES, Minority interests
  12. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):DIRECT FOREIGN INVESTMENT
  13. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):BARRIERS TO INTERNATIONAL TRADE
  14. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):ENTREPRENEURIAL PARTNERING
  15. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):SOURCES OF NEW IDEAS
  16. CREATIVITY AND THE BUSINESS IDEA:METHODS OF GENERATING NEW IDEAS, CREATIVE PROBLEM SOLVING
  17. CREATIVITY AND THE BUSINESS IDEA:PRODUCT PLANNING AND DEVELOPMENT PROCESS
  18. LEGAL ISSUES FOR THE ENTREPRENEUR:NEED FOR A LAWYER, PATENTS
  19. LEGAL ISSUES FOR THE ENTREPRENEUR:TRADEMARKS, LICENSING
  20. LEGAL ISSUES FOR THE ENTREPRENEURS:PRODUCT SAFETY AND LIABILITY, INSURANCE
  21. CREATING AND STARTING THE VENTURE:WHAT IS THE BUSINESS PLAN, PRESENTING THE PLAN
  22. CREATING AND STARTING THE VENTURE (Continued….):WRITING THE BUSINESS PLAN
  23. CREATING AND STARTING THE VENTURE (Continued….):
  24. CREATING AND STARTING THE VENTURE (Continued….):WHY SOME BUSINESS PLANS FAIL, MARKETING PLAN
  25. THE MARKETING PLAN:MARKET RESEARCH FOR THE NEW VENTURE
  26. THE MARKETING MIX:STEPS IN PREPARING THE MARKETING PLAN
  27. THE ORGANIZATIONAL PLAN:DEVELOPING THE MANAGEMENT TEAM, LEGAL FORMS OF BUSINESS
  28. THE ORGANIZATIONAL PLAN (Continued….)
  29. THE ORGANIZATIONAL PLAN (Continued….):THE LIMITED LIABILITY COMPANY
  30. THE FINANCIAL PLAN:OPERATING AND CAPITAL BUDGETS
  31. THE FINANCIAL PLAN (Continued….):PRO FORMA INCOME STATEMENTS, PRO FORMA CASH FLOW
  32. PRO FORMA SOURCES AND USES OF FUNDS:PERSONAL FUNDS, FAMILY AND FRIENDS
  33. PRO FORMA SOURCES AND USES OF FUNDS:COMMERCIAL BANKS
  34. BANK LENDING DECISIONS:SMALL BUSINESS ADMINISTRATION LOANS
  35. SOURCES OF CAPITAL:GOVERNMENT GRANTS
  36. SOURCES OF CAPITAL:PRIVATE PLACEMENT, BOOTSTRAP FINANCING
  37. CAPITAL SOURCES IN PAKISTAN:PROVINCIAL LEVEL INSTITUTIONS, FINANCIAL INSTITUTIONS
  38. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  39. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  40. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  41. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  42. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  43. NEW VENTURE EXPANSION STRATEGIES AND ISSUES:JOINT VENTURES, ACQUISITIONS
  44. NEW VENTURE EXPANSION STRATEGIES AND ISSUES (Continued….):DETERMINING THE PRICE FOR AN ACQUISITION
  45. ENTREPRENEURSHIP & PAKISTAN:GENDER DEVELOPMENT STATUS WOMAN AS AN ENTREPRENEUR IN PAKISTAN