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Venture-Based Economic Development

Introduction to Venture-Based Economic Development

Achieving Sustained Economic Growth Using Venture-Focused Strategies

Adapted from the “Venture-Based Economic Development” workshop

Dileep Rao, Ph.D. President, InterFinance Corporation, Minneapolis, MN

Adjunct Professor, Carlson School of Management, University of Minnesota Co-Author: Business Financing: 25 Keys To Raising Money (New York Times Pocket MBA Series)

Author: Handbook of Business Finance & Capital Sources (American Management Association)

Phone: 763-588-6067 E-mail: [email protected]

September 2004

© Copyright Dileep Rao 2004 (VEDINI.doc) 1


TABLE OF CONTENTS About Us ............................................................................................................................. 3 Executive Summary ............................................................................................................ 4 I. Venture-Based Economic Development Model......................................................... 5 II. Develop Opportunities with “Legs”......................................................................... 10 III. Develop Ventures to Maximize Potential with Minimum Risk............................... 18 IV. Finance Intelligently................................................................................................. 24 V. Conclusion................................................................................................................ 29



About Dileep Rao Dileep Rao is a principal consultant with InterFinance Corporation (IFC), a venture development consulting company. IFC advises governments and area developers in venture-based economic development; consults with businesses and ventures on their business and financial strategies; and assists financial institutions in improving their business-financing impact and portfolios. Previous clients have included the U.S., state and local governments, businesses, financial institutions and development corporations in Minnesota, Wisconsin, South Dakota, Mississippi, Georgia, Arkansas, New York, Puerto Rico, California, Arizona, Tennessee, etc. Previously, Rao was the V.P. of financing and business development and a board member of one of the largest development-finance companies in the U.S., Dr. Rao has financed over 450 businesses using more than $40 million of equity capital, subordinated and senior debt and leases; raised about $80 million from private financial institutions and local, state and federal agencies for businesses and development-finance organizations; and developed 40 speculative industrial buildings & incubators, a 67 acre commercial center & 10 Tax Increment Districts. In addition, Rao managed turnaround businesses in furniture manufacturing; food processing; fast-food; agribusiness; and medical products; and he serves as a director of businesses and financial institutions. Dr. Rao is also an adjunct professor in Entrepreneurship & Venture Financing in the MBA program at the Carlson School of Management (University of Minnesota); and has developed training programs for entrepreneurs and community and economic developers in venture-based economic development; and for corporate executives in corporate ventures. He also offers a web-based tool to help development corporations assist local businesses (www.infinancing.com). He has also written nationally acclaimed business reference books including Business Financing: 25 Keys to Raising Money (Publisher: New York Times, N.Y.) and the Handbook of Business Finance & Capital Sources (Co-Publisher: American Management Association, New York, NY). Sample reviews include:

“Business needs all the help it can get. Like the U.S. Cavalry, (Rao’s) Handbook enters the scene just in time” … Inc. magazine.

In addition to two engineering degrees, Dr. Rao has a doctorate in business administration from the University of Minnesota. He can be reached at 763-588-6067.


http://www.infinancing.com/


Executive Summary Many economic developers focus on recruiting industry to their area. This strategy works well when the area is attractive to expanding or relocating companies that are seeking new locations. Usually these relocating companies like low tax rates and labor costs, in addition to their specific business criteria. However, these companies may move to greener pastures when another area offers lower taxes and cheaper costs. Economic developers can organize a venture-development infrastructure and process that is designed to continuously launch new ventures. The venture-development process is significantly more difficult, and time consuming, than recruiting industry. But the results can be longer-lasting since the process is designed to develop an infrastructure involving multiple parties in a variety of industries to encourage entrepreneurship and constantly develop new ventures. Also, entrepreneurs often display greater loyalty to an area than large corporations. To build a venture-based economy, economic developers need to: • Organize the venture-development infrastructure and a catalyst. • Understand the types of ventures to evaluate and launch based on the cost and benefit of each

type. • Develop and analyze opportunities available and improve the venture-opportunities evaluation

process. • Develop business, marketing, operations, management and financial strategies to develop strong

ventures. • Know the resources these ventures need and find these resources. • Organize a venture-development and financial infrastructure that involves existing and “gap”

financial institutions. This paper offers the outline of a method for economic developers to organize and launch their venture-based economic development process.



I. VENTURE-BASED ECONOMIC DEVELOPMENT MODEL Traditional vs. Venture-Based Economic Development Since most products and businesses reach maturity and then decline, areas usually show economic decline (or lack of progress) when new corporate or independent ventures or products do not replace declining businesses. Areas seeking economic growth can pursue a variety of strategies for development, including: • Attracting branch plants or headquarters of large corporations from outside the area.

Corporations often have a number of options to locate their plants or headquarters. They are attractive to many areas due to the instant economic growth, jobs and credibility they offer, and they are also a quick fix. The strategies and incentives to attract these plants are often considerably different – and usually involve less analysis and financial risk -- than those to develop new ventures. To succeed in this genre, areas offer more incentives than the others in the hunt.

• Recruiting small to mid-sized owner-operated businesses

Many owner-operators do not move huge distances from existing facilities due to the potential disruption to their personal lives. When owner have problems, such as labor costs or shortages, at their current location, they are open to a move to solve the problem. In the last 20-25 years, this was a major source of jobs for rural areas that benefited from the flight of mid-sized manufacturers from urban areas where they had to compete for the best employees with large corporate benefit plans. This type of business usually considers areas where it can dominate the labor force at an affordable cost. If the owner wants to move for personal reasons, it usually is a lifestyle decision. This type of business usually moves to desirable locations for living, such as near the lakes, sea or mountains, etc., so long as it does not handicap the business.

• Developing new ventures, and an infrastructure of venture-development resources, locally The third strategy is one of building ventures locally, based on developing viable opportunities from local or global technologies and products; and organizing strong, well-designed businesses with local or regional corporations and entrepreneurs. While much of the control in this case can be local, it is also one of the more difficult strategies, due to the longer time to show results, the high risk of failure and the need for a strong infrastructure of support organizations, financiers, entrepreneurs, corporations and technologies. But the benefits from this method can be significant -- the building of locally controlled ventures that create wealth, venture spin-offs and jobs.

Why develop ventures? Branch plants of global firms, or owner-operated businesses, may come today and be gone tomorrow. Existing businesses may be too influenced by their existing products, customers and culture to sufficiently adjust to new realities. New ventures allow areas to develop firms that are locally controlled and that may better adjust to new global conditions. In addition, the



development of a new venture development infrastructure allows an area to continuously build new ventures rather than relying on maturing corporations or relocations. Silicon Valley has a world-leading infrastructure for new ventures (financiers, advisors, etc.) that attracts world-class entrepreneurs in leading-edge technologies. This allows Silicon Valley to continue to dominate in global venture development, having started with semiconductors and moving on to biotechnology, personal computers, software and the Internet. This paper suggests strategies for economic developers to develop new ventures in their areas. Models of Venture Development REGULAR VENTURE DEVELOPMENT

Entrepreneurs/ Technologists

Opportunity/ Technologies

Entrepreneur Assistance

Groups

Ventures

Financiers In the “regular” venture development model (assuming that there is such a thing as a “regular” model), entrepreneurs or technologists develop technologies, products, services or projects (hereinafter called “products”) and start a venture. They may then seek help from various types of entrepreneur assistance groups (EAGs) and financiers to launch their ventures. Often the EAGs get involved after technology development, and usually react to entrepreneurs’ requests for help. The help provided is usually uncoordinated among the various resources available, and often provided by consultants with varying degrees of expertise, education and experience in venture development. Entrepreneurs are usually on their own in a Darwinian world. The best survive. Others fail. Many are the “living dead”. And some would say that this is the way it should be.



INCUBATORS

Ventures Entrepreneur Assistance

Groups

Entrepreneurs Technologies

Incubators

Financiers

In the incubator model, incubator developers provide space and an assortment of business services – often in the clerical and administrative area. Some incubators may assist entrepreneurs in the development of the technology or the development of the venture. In an incubator, there is often a conflict between the roles of landlord and venture investor/ developer/ consultant. When a venture cannot pay the rent, the landlord may need to accept rent in the form of stock or notes, or to forgive the rent. This can create a conflict, especially if the incubator owner needs the cash to pay debts. The incubator may introduce the entrepreneurs to other EAGs and financiers. This model may coordinate the provision of services to the venture more than the “regular” venture-development model. But many entrepreneurs do not have expertise in or previous experience in building high-growth ventures; and often cannot attract high-quality advisors who have such experience and access to financing needed for high-growth ventures. Entrepreneurs also usually cannot afford to pay fees for these services. Some high-growth ventures, because of their future potential, often receive high-quality services for nominal fees from the large accounting firms. But the rest don’t get any help or get it from friends, relatives, or volunteers, such as SCORE, or government funded organizations, such as the Small Business Development Centers (SBDC). While this may be better than nothing, often voluntary help (such as SCORE) can be sometimes superficial, and SBDC help may be limited due to budgetary considerations and the consultant’s limited experience and expertise.



COORDINATED MODEL FOR VENTURE-BASED ECONOMIC DEVELOPMENT This paper describes a pro-active, coordinated approach to venture development that uses the available entrepreneurial, corporate, financial and venture development resources in the area, along with resources that can be attracted to the area.

2. Develop Ventures to Maximize Potential Business Strategy, Plans, Management, Space, Advisors

3. Finance Intelligently Amounts, Sources-Institutions, Instruments & Structure

Entrepreneurs

Technologies

Venture Development Partnership

Corporations

Markets

Existing Financiers Develop Gap Financiers

1. Develop Opportunities with “Legs” Where do good opportunities come from?

The principle underlying this model is that the best venture-development strategy requires an independent, unbiased and non-obligated venture-development organization (or partnership) – with no axes to grind or “sacred cows” to worship. This organization coordinates and controls the opportunity’s direction to promote all viable business opportunities, including mid-potential and smaller ventures that may be rejected by venture capitalists seeking high-growth ventures. The organization also encourages prudent risk-taking and the involvement of multiple venture development experts and institutions to independently evaluate opportunities and invest resources with a minimum of “group think.” The benefit of this model is the coordination of the best available resources for opportunity and venture development. To implement the model, area-development organizations (ADOs) need to:



• Develop viable opportunities (with “legs”) by leveraging entrepreneurial and corporate expertise, needs and resources with markets and technologies. Technologies can be sought, analyzed and licensed from around the world based on the interests of the area’s entrepreneurs, corporations and financiers;

• Organize ventures to maximize the opportunity’s potential while reducing risk; and • Finance the venture intelligently with the right amount, instruments and structure from the best

“fitting” private financial institutions and gap-based development financiers (that may have to be organized) to maximize its probability of success.



II. DEVELOP OPPORTUNITIES WITH “LEGS” Track Record for New Products & New Ventures For those seeking safe investments, new products and new ventures are not the right place. The odds are quite scary. According to a study by Booz-Allen (1982), 63 out of 100 new products are canceled, 12 fail and only 25 succeed. According to common “venture capital wisdom,” 20% of venture capital investments in new ventures fail, and 60% are partial failures or have below average returns. This means that only 20% of venture capital investments can be termed successes. And venture capitalists are among the most sophisticated investors in new ventures. Therefore, it would be safe to say that the bulk of new products and new ventures fail. The few “home runs” with astronomical returns pay for the failures, and often give an attractive return for the entire portfolio. How to Find the Right Opportunities Given the large number of failures and the few home runs, finding successful, new venture opportunities could be one of the most difficult tasks in business. As the first step in the process of successfully developing new ventures, finding the right opportunities with “legs” is the key step to filter out opportunities that may be non-viable or inappropriate for the ADO. Not all types of ventures are right for all areas. Each type has its own implications for development. An area, for instance, may not want to focus on software ventures if it doesn’t have strengths in software development, or lacks high-quality software developers, programmers and institutions of higher education in the field. Or it may want to focus on early-stage ventures due to the availability of financiers and entrepreneurs skilled in this stage and experienced in the industry. To select the right opportunities, ADOs can evaluate the risk and potential, or gauge the venture’s management and board of directors, if any. Gauge Management and Board of Directors: Many venture capitalists adopt the “lazy investor’s approach to venture analysis”, i.e. they look at the reputations and track records of those who have decided to invest their time, money and reputation. This naturally assumes that others have analyzed the venture and made a sound decision on the basis of this analysis.

Early in my career, we made the mistake of approving an investment of $100,000 in a software R&D stage venture that needed $700,000 with the condition that they get the remainder from an established venture capital firm. Another V.C. firm provided the financing assuming that we had done the due diligence without even calling us. Neither one of us had done so. This was the last venture we financed based on someone else doing the due diligence.

When they happen to be the first one to see the venture, investors can discuss the venture with executives in the industry, with an eye to recruiting the management team or board. It is a good sign if reputable industry executives with knowledge of the technology and markets decide to join the venture or to make a significant investment. Since ADOs often see ventures at a very early stage, when it is in a pre-product or seed stage, this approach may be desirable.



Understanding Risk: Venture risk can be evaluated based on many factors including the current stage of the venture; type of customer; financing needs; management requirements and long-term competitive advantage. Current Stage: Risk is greater at the early stages of a venture’s growth. This means that areas that focus on very early-stage ventures take on greater risks and have higher potential of loss. Venture stages include: • Pre-Product: At this stage, the venture has the most risk. The risk is that the product may not be

developed, that it may be late, over budget and below expectations, it may have unforeseen competitors, or that the market may not be ready for it. To succeed at this stage requires the best technical expertise and leadership. To compensate for the high risk, investors at this stage require very high annual returns on their investment.

• Seed/ Startup: At this stage, the product can be evaluated by experts and potential customers to see if it offers a value-added benefit to the customers. This information facilitates the development of the right strategy and pricing. However, all of the business risks remain, including the need for a sound business plan, management, financing, customers and profits.

• Emerging Stage: At this stage, the venture has resources and momentum, an initial management team and some customers. However, it will need growth, additional resources and skilled management to reach profitability.

• Growth Stage: At this stage, the venture is usually profitable and growing. To create great wealth, the venture needs to dominate high-growth markets. In addition, it needs good management so as not to spin out of control. This is the stage where a “corporate” style of management is usually required if the venture is to be a public corporation.

• Maturity/ Turnaround Stage: Businesses and corporations need turnaround management when they show signs of maturity and decay. Turnaround management requires removal of the rot and may need “vulture” investors who are experienced at turnarounds. A business’s losses may be due to a number of factors, such as obsolete products, greater competition, declining markets, bloated overhead, etc. Some are more easily rectified than others.

Type of Customer: The type of customer can have a major impact on the venture’s risk and success. Some types of markets, such as a national consumer market (B2C) with complex distribution and marketing channels can be difficult for new ventures that do not have the sophisticated management and large financial resources of a large corporation. Therefore many new high-growth ventures seek business markets (B2B) due to the relative ease of targeting potential customers, or local retail markets that allow step-wise, regional growth strategies (the franchise model is one way to capture market share and growth in this type of industry). The government market may not be very attractive for high value-added ventures due to the government’s normal policy of selecting the cheapest vendor rather than the “best” product. Some ventures get around this by having the bid specifications written to eliminate competitors from the bidding process. Venture Financing Needs: Ventures needing financing for losses, for inventory or for specialized equipment may find it more difficult to find financing than those that need funds for non-specialized fixed assets, or those that need lower levels of funding prior to profitability.



Ventures that need low levels of investment to get started may succeed in the short-term. However, such low-investment ventures may be unable to erect high barriers to prevent new competitors unless they have other competitive advantages. Attractive ventures often need reasonable levels of investment in stages so that investors can provide additional funds as the ventures grow. Stage-wise investing reduces the risk for investors. Ventures requiring large amounts of capital before they show sales and/ or profits, such as processing ventures with large investment needs for plant and equipment at startup, are usually riskier and require more sophistication. These ventures are often better started by corporations or by a partnership with a corporate financier (called a strategic alliance). In general, high-growth ventures need higher levels of, and more sophisticated, resources, as they grow. High-growth ventures that are started in areas without the resources and infrastructure to support them may need to move to areas where they can find these resources, or else ventures in areas with more sophisticated resources may overtake them. Management Requirements: Some ventures, especially those that are high-growth ventures in emerging, highly technical areas, need entrepreneurial teams that are experienced and with solid track records. Not all areas have such entrepreneurial teams, or are able to attract them. Long-Term Competitive Advantage Issues: In normal times, ventures that create the most value (wealth) and area benefits are those with long-term competitive advantages. Areas need to be able to provide the resources needed to help ventures maintain this edge. If such factors are not available locally, or cannot be imported, the venture might relocate or expand to other areas. Evaluate Potential A venture’s potential is another key factor used to select ventures to assist. Opportunities can be ranked based on their potential to become: • Low Growth/ Micro-Potential Ventures: These create employment only for the entrepreneur(s)

and do not attract a great deal of resources or interest. • Moderate Growth/ Mid-Potential Ventures: These are good job creators for many but are often

limited in potential size and may make management comfortable. • High-Growth/ Mid-Potential Ventures: These high-growth ventures find their sales plateau

quickly. They may not be as attractive to the largest venture capitalists, but they can often provide a decent return and benefits for angel investors and ADOs.

• High-Growth/ High-Potential Ventures: These ventures need high levels of resources and expertise, and have the potential to become large corporations and/or create great wealth.

Some factors that influence the potential for an area include industry type and area benefits, market characteristics and scope, and competitive advantage. Industry Type and Area Benefits: Industry characteristics can affect venture growth in a variety of ways:



• Emerging industries allow easier entry for new ventures because of a lack of established competitors.

• High growth industries make it easier for ventures to grow since a rising tide lifts all boats. • High-potential industries create giant corporations. • Industries with high barriers to entry for latecomers allow higher profits for earlier entrants. Usually the best industries for ADOs are emerging ones with high-potential growth rates where the local area offers significant benefits, such as entrepreneurs with desired skills, research laboratories developing new technologies, and long-term infrastructure, resources and (maybe) cost benefits that can be used to develop or attract venture opportunities. In the recent past, areas that have prospered using high-growth industries include Silicon Valley (semiconductors, personal computers, software, biotechnology and the Internet); Austin, TX (personal computers); and Seattle, WA (software). Types of industries include: • High-technology: The pace of change and rate of growth are usually very high. This means that

ventures need to keep up with changing technologies, adjust to emerging strategies and have access to competitive levels of resources, such as financing, management and skilled employees.

• Manufacturing: Manufacturers need a productive and competitive labor force along with a strong infrastructure. They often have high indirect benefits because they purchase large amounts of products and services.

• Services: They can be employment intensive, but wage rates can vary widely based on the levels of skills required and global competitiveness.

• Retail/ Wholesale: Retail stores usually import goods to an area and export wealth – unless they market locally produced goods or serve visitors to the area. They are usually a zero-sum game – i.e. a new retailer succeeds if another fails, unless the market is expanding. However, headquarters of national retail chains can significantly benefit an area due to higher-wage employees.

• Land or Resource-based: Businesses using local resources and advantages, such as location, weather, minerals, etc., can benefit an area. However, commodity businesses may offer lower benefits to local residents than when the area’s resource has a proprietary advantage.

Industry Stage: The stage of the industry can have great impact on area benefits. Emerging industries can be full of opportunities for new ventures that can successfully grow even where rules for industry success have not yet been established. Successful entrepreneurs are likely to be those with proprietary advantages, more resources or with better management. For ADOs, this industry stage offers the most opportunities to encourage the start and growth of new ventures. At the growth stage, since there are other ventures already in place, newer ventures may have a tougher time entering the market unless they have significant competitive advantages over existing ventures. ADOs seeking to enter the industry need better technologies, more resources, better management or corporations who are willing to invest in this industry or buy some of the most promising new ventures that are already serving the market. A mature industry has established corporations serving it. New ventures usually have to serve niche markets that are not served by established companies, especially until the venture is able to establish



a foothold. An area that has a significant concentration of corporations in mature industries might be exposed to consolidations and plant closings. Growth Rate: The industry’s growth rate can also affect development strategy. With low growth rates, there may be minimal changes in benefits for an area. Moderate rates are usually attractive since companies are likely to be enjoying steady growth of revenues, profits and jobs. However, if larger companies want to grow their market share, the resulting competition may drive weaker companies out of business. A high industry growth rate creates significant benefits and opportunities for ADOs, and is also most attractive to investors. However, ADOs should ascertain that area ventures have resources to stay competitive and grow with the industry. Area Benefits: Venture benefits can be direct, such as jobs created and wealth generated by the venture; and indirect, such as creation of local employment and economic activity as a result of the venture’s purchases of goods and services, venture spin-offs, indirect employment, etc. Micro-ventures usually generate a low return on ADO investment due to the limited employment generation and low indirect area benefits. Therefore, it might be more prudent for ADOs to allocate scarce resources to ventures with a higher potential for direct and indirect benefits. In addition to the number of jobs, ventures also create different types of jobs. Some require highly trained personnel and create high-wage jobs. However, without an educational infrastructure, desirable jobs may be filled by people who migrate into the area, and not by locals. Jobs requiring low levels of education or skills may migrate out if other areas have lower costs. Productivity and cost are key issues in today’s global economy, and with the global availability of tools to increase productivity, wage levels often make the difference. Market Size, Potential & Growth Rate: In general, large markets allow larger ventures. In most industries, the laws of competition do not allow monopolies. That is why dominating companies, such as John D. Rockefeller’s Standard Oil, IBM in the ‘60s, and Microsoft, are rarities. Investors are often hesitant to invest in a venture if their investment goals (return on investment) can be attained only if the venture gets an unrealistically large market share. They prefer ventures with long-term competitive advantage (to obtain higher margins and high market share) in emerging industries (without large, existing competitors that can crush a new venture) with huge potential (so the venture has the opportunity to become large even with a small market share) and rapid growth (so their investment grows accordingly). Market Scope -- $ Imported & Competing Area: Ventures that market in regional, national or global markets, “import” wealth into an area through exports of products or services, create secondary employment among vendors and other local firms, and generate spin-offs. As an example, a window manufacturer with national distribution imports wealth into an area. Directly, this manufacturer helps loggers and other area vendors. Indirectly, local retailers are helped by the window manufacturer’s payroll. The same is true of a tourist resort that imports wealth by catering to out-of-area tourists. The wealth is then distributed in the form of payroll to local employees and indirectly to businesses, such as gas stations or retail stores catering to the tourists.



But ventures that sell in wider geographic markets also compete with more distant competitors, and usually require higher levels of resources and sophistication than those that only compete against other locally based businesses. When a small business with a local base and limited resources directly competes against a giant corporation, the small business usually suffers unless it can find a niche not served by the giant. In its early growth phase, Wal-Mart destroyed thousands of small, rural retailers who did not have the resources, sophistication or purchasing power to compete. Competing at a global level requires the highest level of managerial skills, resources and connections. Areas without world-class entrepreneurs or technologists may first need an infrastructure to develop such expertise before attempting to develop ventures that compete on a global basis. This means that ADOs may need to match world-class educational, technology and productivity standards, and find entrepreneurs with the sophistication to compete on a global scale. Sometimes a business that is started to serve local needs gets a wider customer base and expands to national or global markets. For the venture to continue to succeed, it may need an advantage that is available locally (such as natural resources) or be able to attract the type of resources or managerial talent that it needs to compete globally. Where the venture finds it difficult to recruit the needed managerial talent, or where the managers are attracted to “warmer climates”, it may move -- as Gateway did when it moved from South Dakota to San Diego. Competitive Advantage: Ventures with high levels of proprietary advantages, all other things being equal, are more desirable than those with limited, or no, proprietary advantages due to the potential for greater profitability and wealth creation, and lower risk. If, in addition, the ventures are in high-potential and fast-growth industries, they can create greater economic benefits. However, ventures at the leading edge of technology need technological resources to maintain competitive advantages. Thus a software company may be better positioned in Seattle or Silicon Valley due to the huge concentration of software experts and companies in those areas. Areas that have ventures with low barriers to entry are more likely to face a higher rate of failure unless there are some natural advantages locally. Similarly, ventures with low levels of technology and value-adding products are unlikely to pay higher wages, all other things being equal. Improving the Odds of New Products: Uniquely Superior Product In a study of 203 new products (R.G. Cooper and E.J. Kleinschmidt in Marketing, 7th ed., by Roger A. Kerin, Eric N. Berkowitz, Steven W. Hartley and William Rudelius; McGraw-Hill, Irwin), the key factor affecting new product success was whether the product was uniquely superior. Factors Affecting NP Success Winners Losers Difference

Uniquely superior product 98% 18% 80% Clear definition pre-development 85 26 59 Fit with firm’s R&D/ Mfg. 80 29 51 Execution of R&D 76 30 46



Fit with marketing 71 31 40

Execution of marketing 71 32 39

Market attractiveness 74 43 31 A better product, especially one with proprietary technology, gives a venture numerous advantages, including the potential of higher margins, fewer competitors and higher valuations. Thus ADOs seeking to build successful ventures should seek to find uniquely superior products. Product Convergence: How to Find Uniquely Superior Products Product Convergence is defined to occur when product benefits match customer needs creating competitive advantage. Product convergence can be supply-based, trend-based or demand-based. Supply/technology-based convergence occurs when a product-technology is developed based on developers’ expertise or entrepreneurs’ instinct, and a venture is formed. Often, these ventures fail if the products don’t fit customer needs, don’t offer benefits large enough to cause customers to switch, seek markets that may not (yet) exist or if markets are too small. Trend convergence occurs when ventures are formed to take advantage of potential markets based on extrapolating trends. Trends can be technology-based or demand-based. Technology-based trends are those that predict technology (supply) advances and their impacts. There are many ways to predict technologies, and their use is often expensive or time-consuming or both. Demand-based trends are those that predict future markets. One key market trend now is the aging of the baby boomers, and many financial and medical services firms and retirement areas are trying to take advantage of this trend. The key problem with trend convergence is the fact that the future seldom unfolds the way we would like it to do so, and most long-range forecasts are wrong. Market/demand-based convergence occurs when a developer identifies an attractive market that is underserved and finds a technology to solve the customer problem and create a venture. Market-Focused Innovation Market-focused innovation is based on market/ demand-based convergence. It differs from supply-based innovation in that it starts with market needs rather than technology development or availability. In supply-based innovation, which can be considered the “standard” way to start ventures, the technology is developed or licensed, and then the venture developer tries to find a market. If there is a need, the developer starts a venture. In market-based innovation, the developer first identifies markets and quantifies market size. The developer then finds alternative, proven methods to solve the problem; licenses or acquires the best technology to develop the product and then satisfies market needs. The venture developer focuses on market needs to find the best solution rather than on selling a specific technology.



Market-Based Area Development ADOs also have the option of pursuing venture development strategies based on available supply, unfolding trends or underserved markets. Most areas that do pursue an organized venture development strategy use the supply-based method. They either look to the technologies that are developed by local universities or technologists, or to ventures started by local entrepreneurs. Using a market-based venture development strategy is tougher because it starts with defining underserved markets and then identifying and obtaining the best technologies to exploit the market. Most venture development organizations don’t implement this strategy since they don’t know which markets to pursue; and even if they are able to identify viable markets, they need to know how to find the best technologies and convert them to commercially viable products. ADOs can pursue both strategies. A supply-based approach may result in lots of activity while pursuing all the available technologies and entrepreneurs, and the ability to reject infeasible ventures and technologies will be the key to success. A market-based approach may require new expertise and result in fewer ventures being started. But it is less likely to result in failures or “living-dead” ventures. Evaluating the Opportunity Whether the product is developed based on supply or demand, the first step is to evaluate the opportunity. The key question is whether the opportunity is viable or if it should be discarded? If viable, is the venture likely to be a major corporation, a mid-sized company, or a micro-venture? To evaluate these issues, some of the key questions to address are: • Market: What is the current size of the market, the potential and the growth rate? How badly do

customers want the new product? Is there a major unmet need? • Competitive Advantage: What is the competitive advantage of the product and the value added

to the customer? This influences gross margins, long-term profitability and valuation. • Management: Does the venture have, or can it attract, the type of management needed to fully

exploit its potential? • Risk/ Reward: What is the amount of financing required to achieve the venture’s potential, how

easily can it be financed, what is the risk, and what is the potential valuation? Can it offer a level of reward commensurate with the risk?



III. DEVELOP VENTURES TO MAXIMIZE POTENTIAL Venture Needs To succeed and stay successful, businesses need superior: • Opportunities: ADOs can help local ventures find viable new products and technologies from a

variety of sources, such as universities, research labs, other ventures, venture capitalists, corporations, etc. Finding a steady stream of new technologies and being able to analyze their market potential can significantly help local ventures, and be a source of competitive advantage.

• Entrepreneurs and Management Skills: Along with a superior product, management is a key ingredient for venture success. Most sophisticated investors will only invest in ventures that have strong, balanced management teams with a successful track record, and stage and industry experience. ADOs can develop training programs for entrepreneurs and managers to provide them with the fundamentals of analyzing opportunities, developing strategies, finding resources and managing growth. Experienced investors, however, would prefer management with experience and successful track records. Also, peer groups of advisors have been found to be successful since entrepreneurs often learn a great deal from their peers’ experiences and lessons.

• Business Strategies: ADOs can help to tailor the business to the opportunity by independently analyzing and assisting in business strategy and plan development.

• Advisors: The local area may need accountants, attorneys and consultants who are experienced in the type, stage and potential of ventures being developed. Often these experts help entrepreneurs stay out of problems and build successful businesses.

• Financing: Different types of ventures need various types of financing. Financing can be classified by uses (initial operating capital, inventory, accounts receivable, equipment, and real estate); and by instrument (equity, senior loans, subordinated loans, leases, etc.). Areas need to have sufficient sources of financing for the type of venture they want to develop.

Other Business Needs: The ventures may also have other needs. These include educational resources to be able to recruit from a trained and high-quality workforce, utilities, communications, land and buildings, transportation, labor, financial institutions and positive community attitudes. Quality of Life Issues: Communities that score high on quality of life issues often find it easier to attract high-growth ventures, entrepreneurs, financiers, advisors, etc. Some qualify of life aspects include recreation, health facilities, cultural amenities, shopping centers and religious options. Location Inducements for Recruitment: It may be necessary for areas to recruit the missing ingredient(s) for their venture development strategy. This could be a center for research (Micro-electronics Center by Texas, or Scripps Institute by Florida), venture capitalists, advisors, etc. Competitive Strategies to Capture Potential Venture strategies are often quite different from corporate strategies.



Corporations usually have more money and management than growth opportunities. Their key question is whether their existing assets are productively employed, and how to find growth opportunities. In the absence of internal growth opportunities, they acquire other businesses (usually with poor results) to show their shareholders that they are doing something productive to enhance shareholder value. Growth ventures, on the other hand, usually have more opportunities to grow (hopefully profitable) than money and management. They continuously have to raise money to feed their growth and have to ration their scarce resources, and management time and attention. Some key strategy issues that ventures should consider include: • Focus: Although ventures may like to diversify their risk by launching a number of products or

targeting a variety of markets, the counter-intuitive reality is that focused ventures often do better than unfocused ones. Ventures should consider focusing on the best product-customer segment combination– the segment where they can get the most profitable sales in the least time and the lowest cost to reach profitability. Ventures gain tremendous levels of credibility once they reach profitability. The venture can consider expanding to new products and/ or segments after it dominates the initial product-segment combination.

• Type of customer segment: Ventures targeting a large, national consumer market via complex distribution channels and expensive national advertising might find that the strategy is very expensive and tough to finance. Conversely, ventures targeting easy-to-reach business customers who can be sold quickly, economically and profitably find investors more interested.

• Missionaries vs. Second Movers: Corporate ventures can be strong “second movers” leaving the missionary work to smaller ventures because the corporations can try to use their larger resources to capture market share after the market is proven. Microsoft has done this with the database, word processor, spreadsheet and browser. Or large corporations can even buy the venture that has the best chances of success after it has proven the market. Many large medical device manufacturers use this strategy.

• Swing for the Fences: Corporate ventures also have the option of “swinging for the fences” (as noted by Karl Ulrich of MIT in a keynote address to the Carlson School of Management). This might make sense when the opportunity cost is high (the corporation cannot afford to be left behind) and the technology risk is low. Many corporations did this with the Internet since they did not want to risk being left behind in case the boom was real.

• Marketing: Ventures should also consider using marketing strategies that will yield quick and desired results. This means pricing and packaging appropriately for the right market segment; and using sales drivers that offers an attractive revenue-to-cost ratio.

• Operations: The question of “make vs. buy” can be a crucial decision. Making the product may require a higher investment but may allow better protection of technology and quality control. Buying it from others may reduce the up-front cost, but reduces margins and may make the venture more vulnerable to loss of competitive advantage.

• Financing: The financial strategy of the venture, including the levels of debt, equity, grants and incentives, can influence the terms and cost of the financing and the success of the business.

• Competitive Advantage – Level of Convergence: Companies can seek convergence at the product, application or business levels. As noted earlier, product convergence means that a new product better satisfies customer needs and creates competitive advantage. This is sometimes



termed “first mover” advantage and often involves “revolutionary or breakthrough” products. Visicalc offered a breakthrough product – the spreadsheet for the personal computer allowing financial analysts to automate what was previously a back-breaking task. However, while some new ventures are started based on product convergence, other ventures try to achieve competitive advantages by improving an existing product to better satisfy customer needs. Lotus improved the spreadsheet and destroyed Visicalc. Business convergence occurs when a company uses business advantages – with or without product advances – to dominate the industry. Competitive advantages could be sought by employing more, and better, resources in operations, marketing, financing, alliances with dominant “standards”, etc. Microsoft packaged its spreadsheet (Excel) with its word processor, database and other key business software to dominate Lotus. Other similar examples exist in the Internet Browser, passenger jet airplane, mainframe, copiers and personal computer businesses.

Product: First-Mover Application Business Spreadsheet for PC Visicalc Lotus Excel Internet Browser (Commercial) Netscape Netscape Explorer Passenger jet airplanes Comet Boeing Airbus? Mainframes Univac IBM IBM Copiers Xerox Xerox Many PC Apple IBM Dell

Management Many venture capitalists assert that management is the key factor influencing the success of the venture. According to this thinking, bad management will screw up great technology, while good management will make a poor opportunity attractive. However, it would be fair to say that it is preferable to have both, and most sophisticated investors look for good management and an attractive product when they invest. Some of the key issues regarding management are: • Industry & Stage: Most venture capitalists prefer to see management that has experience in the

venture’s industry and stage, and a track record of successfully creating wealth. On-the-job training is not recommended. This means that these investors may change management to fit the needs of the next stage of the venture.

• Teams: Sophisticated, high-growth ventures are complex and fast-changing, and require a team to keep it growing rapidly and towards profitability. Teams that have worked well before have been shown to perform better than teams that have not.



Corporate Venture Strategies Corporations can play a significant role in local venture development. Some key areas include: • Creating markets: Corporations can create purchasing programs to buy from new ventures in the

target areas. Such programs exist in most metro areas for companies owned by minority entrepreneurs. This program can be the first needed boost for new ventures.

• Creating opportunities: Most corporations develop technologies that are of no use to them. These are technologies that may lead to profitable ventures but don’t fit the corporation’s current strategy. Licensing these technologies may be one more way to start ventures.

• Strategic Alliances: Often new ventures have technologies that fit corporate products, markets, channels, operations or strategic vision. The corporation can take advantage of these synergies while investing a small amount of resources (from the corporate perspective) in these ventures.

• Corporate Ventures: Corporations can start wholly-owned ventures (when corporate resources are needed and the corporation does not want to share equity), majority-owned ventures (corporations want management or others, such as holders of some key technology, for a small share) or minority-owned ventures (venture needs to have independent decision making) when the technology or market may have potential but: o The potential may be too uncertain for the corporation. o The industry’s rules may not be set, as is often true in an emerging industry: Corporations

work better when industry rules are less dynamic because corporations don’t adjust to changes very easily.

o The product is a breakthrough (revolutionary) product: Breakthrough products are often significantly different from existing ones, and may not easily fit within the corporation’s existing markets, channels, supplier networks, etc.

o The product may not fit easily with, or within, existing corporate divisions and may become an “orphan” that is starved for resources.

Area Development Organizations Strategies and Roles ADOs can employ a variety of strategies to develop ventures. ADOs that use the right strategy with the appropriate skills are more likely to be successful than those that are unfocused, untrained, or pick the wrong strategy. Each strategy has its own skill and resource requirements and offers different levels of risk. Infrastructure: Infrastructure – roads, sewers, schools, etc. – is a basic requirement for venture development. Different types of industries need varying types of infrastructure. For example, software requires software training institutes, and perhaps global communications. ADOs need to make sure that the infrastructure meets the requirements of the ventures being considered. Real Estate: ADOs can also assist with real estate, including the development or financing of industrial parks and buildings for industrial, technology and commercial businesses. In addition, ADOs may have to be involved in speculative and incubator buildings. These strategies will not be covered in detail in this paper.



Business Development: ADOs can also offer a coordinated strategy for business development. This can include new technologies and products; business strategy and plan development; resources and financing; and business consulting. ADOs should also select the roles that fit their skills, experience, resources and area needs. The ADO can be the coordinator, entrepreneur/ manager, consultant or financier. In selecting their roles, ADOs might want to consider the requirements for each role and the skills and resources of the ADO. Options include: • Coordinator: Rather than providing any services directly, the ADO can be the key coordinator

at the nexus of the entire venture development process. The benefit of this process is that the ADO can be evaluate the organizations working in the consortium and add or remove resources as needed. The drawback often is that the ADO may be able to perform many of the tasks itself and more efficiently. But getting specialized firms may improve the quality.

• Entrepreneur/ Operator/ Partner: As entrepreneur/ operator, ADOs can develop new projects

or acquire existing companies for growth or turnaround. Types of businesses can include active companies, such as manufacturing, that require daily management and control, or more passive businesses such as real estate, that may not require daily operational control.

ADOs can also develop businesses in partnership with others who have complementary skills and resources. Often these partnerships are tilted in favor of the private partners, if any, who accurately perceive that they can take advantage of the ADO. Either they expect higher management fees or share of gains or lower contributions than the ADO. The key is to know what type of return the ADO needs and to control the incentives.

• Consultant: ADOs often advise entrepreneurs who are starting or growing new businesses. The

expertise and experience levels of these advisors vary widely. Often the advice is offered at no charge and the entrepreneurs are usually reluctant to criticize poor advice because they are not paying for it. ADOs also play an important role in developing human resources for businesses. Many ADOs help businesses by interviewing and recruiting employees, and in training and development. Often the ADOs are chartered to help targeted residents, such as low-income or minority residents.

• Financier: ADOs can offer equity, debt, gap financing or investment banking services. One of

the key strengths for ADOs is to know how to analyze businesses to determine financing needs, develop a financing plan with the right amounts, sources and terms of financing, and raising it for the venture. By developing the right financing structure, based on their stage, growth potential and needs, ADOs can contribute greatly to reduce the risks of loss by improving the terms of financing. But it is not enough to develop business and financial plans. Some businesses also need assistance in finding financing, especially since many entrepreneurs may not have much experience in this area. Offering investment banking services may be a needed first step for ADOs. Financial strategies are covered in greater depth in the next chapter.

Points to Note When Selecting Strategies and Roles



Some key points to note when selecting the right strategies and roles are the following: • An active company demands more time and expertise, while the management of passive

companies is usually easier due to lower needs for daily management and monitoring. • When considering a turnaround, it is worth evaluating the reasons for the business’s problems

before undertaking the effort. Sometimes ADOs get involved in turnarounds to “save the jobs” and end up supporting dinosaurs or offering more in incentives than the jobs are worth. Many companies have problems when they lose their competitiveness. The analyst needs to understand the nature of the problems and the causes. Some problems can be fixed more easily than others.

• Whether the right management for the ADO and the ventures exist locally, or can they be attracted to the area?

• Are the markets for area ventures growing, stagnating or shrinking? It is difficult to grow in shrinking markets. And do area ventures have a long-term advantage in satisfying the needs of their markets?

• Does the ADO have the management resources to implement its strategy? Some strategies and implementation roles, such as that of entrepreneur/ manager, take a lot of time.

• Does the ADO have the level of funding required – given the high risk and often minimal returns?

• Does the ADO have the stomach for the role, since direct involvement in the development of the business may often mean dealing with venture problems on a daily basis? Given the nature of the ADO, these problems might have to be discussed in total public view. And financing businesses with personal guarantees may mean foreclosing on area entrepreneurs. Sometimes, venture development is not pleasant.



IV. FINANCE INTELLIGENTLY Ventures need financing for growth. But to ensure that the financing provided is structurally sound, ADOs need to know the right amounts for each use, to access the most appropriate types of financial institutions, and use the right instruments and structure. Financial gaps occur when certain types of financial institutions that are needed for venture development do not exist in an area. ADOs may need to fill these gaps by organizing these needed institutions. Gap financing usually has higher risk and lower return than private financing, but is attractive for area developers because it can leverage significant amounts of financing from other institutions or be “bridge financing” enabling the venture to grow to attract other financing. Types of gaps are a shortage of equity capital for startups, unsecured working capital for growth, or subordinated debt to enable senior debt financing. How can an area know if there is a gap? One way is to evaluate the existence and/ or track record of financial institutions in an area. For instance, if there are no venture capital firms, this may signify a need. Or even if they exist in an area, they may prefer to invest in later stages leaving a gap in early stage financing, or invest in other areas of the country, such as Silicon Valley or Boston, due to the potential for higher returns and better ventures. To measure a gap, it often helps to survey financiers, businesses, entrepreneurs and advisors, and to compile the numbers of deals, amounts invested and types and stage of ventures and to compare these numbers with other areas. For example, in the 1970s and 1980s, many banks were not very eager to use the Small Business Administration programs, complaining of too much paperwork; and many rural banks did not want to finance manufacturers due to lack of experience. ADOs filled this gap in banker interest, and helped their local regions capitalize on the trend of mid-sized manufacturers moving to small towns. Factors Affecting Development Finance Area development financial institutions can offer a variety of types of financing such as equity, senior debt, subordinated debt, loan guarantees and leasing. There are many factors that can affect the success of these funds, including: Uses: Financing can be used for operating expenses (initial losses), for current assets such as inventory and accounts receivable, or for fixed assets such as equipment and real estate. Financing fixed assets, such as real estate and equipment, are often less risky than financing operating expenses and inventory. So often the “gap” requirement is for operating expenses and inventory, which may result in higher loss rates. Financing Instrument & Security Position: Financing instruments used can be senior, subordinated or unsecured loans; leases; subordinated convertible debt; common or preferred stock; warrants; grants, or a combination of the above. Senior debt financing usually has lower risk than subordinated financing or equity, all other things being equal. Although subordinated risk has



higher risk than senior debt, in development financing it is often not accompanied by higher returns. Unsecured loans carries the highest risk of all (again, all other things being equal) and may often only be personally guaranteed by the entrepreneurs (but these guarantees may not be worth much). Term: Longer term financing carries greater risk to the financier due to possibility that the business may fail in the long-term, or that the value of long-term, fixed rate debt may fluctuate dramatically with changes in interest rates. But for a business, long-term, fixed rate loans are attractive due to the reduced risk from lack of volatility. To protect themselves, banks and other private financial institutions attempt to pass on the interest rate risk to the borrower by offering variable rate loans. To reduce risks to businesses and to develop their area, ADOs may have to fill the gap and offer fixed-rate financing. Stage: The stage of the business influences risk to a great extent. Larger businesses at later stages have customers, management, infrastructure, etc., and are usually less risky than ventures at earlier stages. Businesses at a research and development stage carry the highest risk since the product may not be developed according to expectations. At the startup stage, the product risk is lower since it is now available for analysis and sale, but the other business risks remain. At the growth stage, the key risk is uncertainty over the ability of the business to continue growing to reach the levels needed to provide an adequate return to investors. At the maturity stage, there is the risk of falling sales and potential losses. Industry: ADOs can offer financing to a variety of industries, such as manufacturing, services, wholesale/ retail, real estate, high-technology, etc. Some types of industries, such as manufacturing, may need more resources and financing due to the need for inventory, accounts receivable, equipment and real estate. And manufacturers, and some service providers, also face the threat of global competition. But manufacturers may also offer more area benefits in the form of jobs and indirect benefits, such as purchases from local businesses. Active businesses, such as manufacturing, change more frequently and therefore require more monitoring. Passive businesses, such as real estate with long-term leases to strong tenants, often require less monitoring and have less potential risk of loss. Growth potential and proprietary advantage: Investing in companies with higher growth potential and proprietary advantage often leads to more benefits. But such companies often need more sophisticated resources and world-class technologists to avoid obsolescence and they are likely to move to areas where they will find these resources. Management: Financiers like businesses that are led by committed management (often exemplified by a significant investment of their net worth or a cut in salary from their previous jobs) with the appropriate industry and stage experience, and a track record of success. Risk and Return: Sound financing requires that the potential rewards match the risks. Experienced ADOs learn how to reduce risk while satisfying area business needs. But the level of anticipated return is often a dilemma for ADOs. Businesses expect them to charge a lower rate (reduced dilution if equity) than private financial institutions as an incentive to expand in the area. However, when combined with higher risk, this practice can often mean disastrous for the ADOs.



Actually in one fund that I was co-managing, a foundation that was analyzing the performance wanted to know why our loan losses were so low. Their comment was that the fund was not taking sufficient risk even though each business in the portfolio had been denied funding by area financial institutions. Frankly, I thought that the area financial institutions did not know how to analyze these kinds of businesses (manufacturers) and therefore did not finance them even though the lenders’ risk could be managed – as we did. And this was exactly the rationale for organizing the gap fund.

Liquidity: Some types of instruments, such as loans, allow the ADO to have greater liquidity than others, such as common stock. However, the business may prefer common stock due to their reduced risk. Amount of Investment per Benefit Unit: The level of benefits that the area can expect for each dollar invested, such as investment per job, is a key benefit for ADOs. Higher risk investments should require greater benefits than lower risk financing. Size of loan: Since the amount of “due diligence” required for a loan does not vary significantly with the size of the loan, the interest rate needs to be higher for small loans. But often these “micro-loan” borrowers are the ones that need lower rates the most due to their lower profitability. Potential Return on Investment: Too high a return on investment may be counter-productive by holding back venture growth. Lower cost of financing may not only help venture growth, but could also encourage other funding sources to provide resources. Type of Area Served: It is difficult to find high-growth ventures in rural areas ir in the inner cities. However, many rural areas were attractive to mid-sized manufacturing companies before manufacturing started migrating to China. Staff Capabilities: Attracting equity experts or investment bankers to rural areas is often difficult. Therefore, most ADOs that are involved in financing offer loans. Deal Flow: Entrepreneurs always want additional financing options since they think it enhances their chances of obtaining financing more competitively. However, sometimes financial institutions may not have adequate high-quality deal flow. As an example, while venture capital is a highly touted need for businesses, most areas don’t see enough high-potential venture deals to balance the risk involved in such investments. Thus area development funds that invest exclusively in venture capital may find that the pressure to invest may force them to finance businesses that they should not consider. To offset this problem, many ADOs offer more than just venture capital. Issues by Type of Financing Equity Capital: While there may be a need for development venture capital, the problem is that most community development venture capital (CDVC) deals are not potential “home runs” – the few ventures in a venture capital portfolio with extremely high returns that make up for the losses and provide a return that balances the risk assumed. This reduces the overall return for CDVCs. The



actual returns are not always clear since CDVCs do not have to show audited returns from their entire portfolio and can adjust their returns by various tactics such as omitting failures, adding grants, valuing the deal unrealistically, investing outside their area to raise the returns, etc. Debt: There are a plethora of development financial institutions providing various types of debt financing, including short-, mid-, or long-term senior, subordinated or unsecured loans for inventory, accounts receivables, equipment, real estate, stocks and bonds, personal homes and other assets. Some of the issues faced by development finance lenders include: • ADOs assume higher risks in their lending when they only finance businesses that are rejected

by banks. When ADOs do finance a business jointly with a bank, very few of them share collateral on an equal priority with bank loans. Mostly, banks want development financing sources to either subordinate their loan to the bank’s loan, or to guarantee the bank’s loan. This is tantamount to providing a subsidy to the bank to work with businesses that are considered high risk. But not all businesses rejected by banks are poor risks – often the banks may be too conservative or not experienced in more complex businesses. And most ADOs do not compensate for this higher risk by charging a correspondingly higher rate.

• Since it is easier to re-possess leased equipment, some development financial institutions prefer leases when financing equipment for high-risk ventures.

• Some ADOs have a tough time collecting on their loans and foreclosing on defaulted entrepreneurs. This can hinder the success of the loan portfolio.

• It is easier to analyze an existing business than a new one. Since ADOs usually finance new businesses, they will need more sophistication than bankers.

Investment Banking: ADOs can be most helpful to businesses by becoming experts at raising money for businesses – by becoming investment bankers. This means that they use their expertise and connections to raise financing from the best combination of local, state and federal development financing sources and the most competitive private financial institutions. To become an investment banker, ADOs can use the following steps to finance business intelligently: • Analyze the Business’s Needs: Know how much money is reasonably needed (based on sound,

defendable projections) by stage or year, by use and by type, i.e. the levels of equity, debt and development financing needed each year.

• List Potential Business Financiers: Each area has its own mix of available local, regional and national financial sources for equity, debt and development financing. ADOs can help local businesses by knowing all the available financial sources and considering them for each business. ADOs can also organize gap financial institutions when needed. As an example, ADOs are working with local financial “angels” who often provide equity financing even when the venture may have lower potential than some “home run” ventures, or when it is at an early stage when risk is higher.

• Know the Financiers’ Criteria: All financiers have criteria, which include the venture’s potential, stage, risk, cash flow, collateral, management, etc. Knowing these criteria will save



time and money when raising financing by minimizing dead-ends.

• Develop the Business’ Criteria: Although most startups are grateful to obtain any kind of financing, businesses should also have criteria to select financiers, such as cost, terms, covenants, penalties, mutual goals, etc. Some financing types may look attractive, but may impede growth and profitability.

• Structure the Financing: The right structure should optimally blend financing levels by stage, type of financing, financial institutions and instruments to achieve the venture’s goals at the least available cost, while satisfying financiers’ criteria so they approve the financing. Often this involves judgment. As an example, a high growth venture may raise too much expensive money in an earlier stage to avoid the risk of lack of availability later, but suffer greater dilution. But if it raises just enough to get by in an earlier stage, and if financing is not available at the later stage, the venture may have to fold.

• Best Way to Raise Financing: Businesses can raise money using private placements from

individuals and institutions or from public offerings. Each method has its advantages and costs. Selecting the wrong one can be expensive.



V. CONCLUSION Venture-based economic development can be a very attractive strategy to develop areas, and complementary to recruiting industry from other areas. By organizing the partnership and selecting the best organizations to be involved, it allows the ADOs to coordinate the resources of the area to make venture development more efficient and effective. ADOs also need to decide whether to have an industry focus. While there are advantages of specialization and focus, the weakness is that today’s growth industry is tomorrow’s slow-growth, mature industry. So this strategy requires constant adjustment to new trends, markets and technologies. And focusing on one industry can result in a non-diversified area portfolio that could suffer if the industry suffers from a downturn. If the partnership does decide to focus, it needs to know the requirements to succeed in the industry, and whether the area has these requirements. ADOs need to select the right types and stages of ventures based on their staff’s experience and expertise, and depending on the needs of the area. Different types of ventures have varying levels of benefits for areas, and the stage influences risk, so this selection is a key decision. ADOs can provide maximum benefits, with the lowest investment, if they develop the expertise to analyze and finance companies – become investment bankers. With a regional or national reputation for building sound ventures, they could even obtain financing from outside the area, resulting in even greater benefits. Just as the existence of real estate developers and complementary financial institutions results in a continuous flow of new buildings (based, of course, on demand), similarly the existence of venture developers and venture financiers can result in an infrastructure that continuously develops ventures and benefits an area.


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