Entrepreneurship: Successfully Launching

New Ventures
Seventh Edition

SEHS4675
LECTURE 8

Building a New-Venture
Team

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Learning Objectives
8.1 Explain the concept called liability of newness.
8.2 Describe a new-venture team and discuss the primary
elements that form such a team.
8.3 Identify professional advisers and explain their role in a
new-venture team.
8.4 Explain why a new-venture team might use consultants
to obtain advice.

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New-Venture Team
• New-Venture Team
– Is the group of founders, key employees, and advisors
that move a new venture from an idea to a fully
functioning firm.
– Usually, the team doesn’t come together all at once.
Instead, it is built as the new firm can afford to hire
additional personnel.
– The team also involves more than paid employees.
▪ Many firms have boards of directors, boards of
advisors, and professionals on whom they rely for
direction and advice.

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8.1 Liability of Newness as a Challenge
• New ventures have a high propensity to fail.
• The high failure rate is due in part to the liability of
newness, which refers to the fact that new companies
often falter because the people involved can’t adjust fast
enough to their new roles and because the firm lacks a
track record of success.
• Assembling a talented and experienced management
team is one path that firms can take to overcome these
limitations.

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8.2 Creating a New-Venture Team
• A well conceived business plan, one that flows from the
business model the firm established previously, cannot
get off the ground unless a firm has the leaders and
personnel to carry it out.
• The way a founder builds a new-venture team sends an
important signal to potential investors, partners, and
employees.
• In general, the way to impress potential investors,
partners, and employees is to assemble as strong a
team as possible.

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Figure 8.1 Elements of a New-Venture
Team

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Table 8.1 Common Mistakes Made When
Assembling a New-Venture Team (1 of 2)
• Placing unqualified friends or family members in
management positions.
• Assuming that previous success in other industries
translates automatically to your venture’s industry.
• Presenting a “one-person team” philosophy—meaning
that one person (or a small group of people) wears all
hats with no plans to bolster the team.
• Hiring top managers without sharing ownership in the
firm.

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Table 8.1 Common Mistakes Made When
Assembling a New-Venture Team (2 of 2)
• Not disclosing or talking dismissively of management
team skill or competency gaps.
• Vague or unclear plans for filling a firm’s skill or
competency gaps.

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The Founder or Founders of a
Venture (1 of 3)
• Founder or Founders
– The characteristics of the founder or founders of a firm
and their early decisions have a significant impact on
the manner in which the new-venture team takes
shape.
• Size of the Founding Team
– Studies have shown that 50% to 70% of all new
ventures are started by more than one individual.
– Experts disagree about whether new ventures started
by a team have an advantage over those started by a
sole entrepreneur.

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The Founder or Founders of a
Venture (2 of 3)
• Size of the Founding Team (continued)
– Teams bring more talent, resources, and ideas to a
new venture.
– The psychological support that the cofounders of a
business can offer one another can be an important
element of a new venture’s success.
– Team members can easily disagree in terms of work
habits, tolerances for risk, levels of passion for the
business, ideas on how the business should be run,
and similar key issues.

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The Founder or Founders of a
Venture (3 of 3)
• Size of the Founding Team (continued)
– Teams that have worked together before, as opposed to teams
that are working together for the first time, have an edge.
– Teams with members who are heterogeneous, meaning that they
are diverse in terms of their abilities and experiences, rather than
homogeneous, meaning that their areas of expertise are very
similar to one another, can be beneficial.
– The team is not too big.
▪ A founding team can be too big, causing communications
problems and an increased potential for conflict.
▪ The sweet spot is two to three founders.

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Table 8.2 Preferred Attributes of the Founder(s)
of an Entrepreneurial Venture
Attribute Explanation

Firm started by a team New ventures that a team starts can provide greater resources, a broader
diversity of viewpoints, and a broader array of other positive attributes
compared to ventures that individuals start.

Higher education Evidence suggests that higher educational experiences enhance value-
creating entrepreneurial skills.

Prior entrepreneurial Founders with prior entrepreneurial experience are familiar with the
experience entrepreneurial process and are more likely to avoid costly mistakes than
founders new to the rigors of the entrepreneurial process.

Relevant industry Founders with experience in the same industry as their new venture most
experience likely have better-established professional networks and more applicable
marketing and management expertise than founders without relevant
industry experience.

Broad social and Founders with broad social and professional networks have potential
professional network access to additional know-how, capital, and customer referrals.

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The Management Team and Key
Employees
• Startups vary in terms of how quickly they need to add
personnel.
– In some instances, the founders will work alone for a
period of time. In other instances, employees are
hired immediately.
– A skills profile is a chart that depicts the most
important skills that are needed and where skills gaps
exist in a new firm.

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Figure 8.2 Skills Profile for New Venture
Fitness Drinks

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Table 8.3 Sources of Labor for New
Ventures (1 of 2)
• Full-or Part-time Employee
– Someone who works for a business, in person or
remotely, utilizing the business’s tools and equipment
and according to the business’s policies and
procedures.
• Intern
– A person who works for a business as an apprentice
or trainee to obtain practical experience.

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Table 8.3 Sources of Labor for New
Ventures (2 of 2)
• Freelancer (or contractor)
– A person who is in business for themselves, works on
their own time with their own tools and equipment, and
performs services for several clients.
• Virtual Assistant
– A freelancer who provides administrative, technical, or
creative assistance to clients remotely, often from a
home office.

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The Roles of the Board of
Directors (1 of 3)
• Board of Directors
– If a new venture organizes as a corporation, it is legally
required to have a board of directors.
– A board of directors is a panel of individuals who are
elected by a corporation’s shareholders to oversee the
management of the firm.
– A board is typically made up of both inside directors and
outside directors.
▪ An inside director is a person who is also an officer of
the firm.
▪ An outside director is someone who is not employed
by the firm.

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The Roles of the Board of
Directors (2 of 3)
• Formal Responsibility of the Board
– A board of directors has three formal responsibilities.
▪ Appoint the officers of the firm.
▪ Declare dividends.
▪ Oversee the affairs of the corporation.
• Frequency of Meetings and Compensation
– Most boards of directors meet three to four times a
year.
– New ventures are more likely to pay their board
members in company stock or ask them to serve on a
voluntary basis rather than pay a cash honorarium.
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The Roles of the Board of
Directors (3 of 3)
• Provide Expert Guidance
– Although a board of directors has formal governance
responsibilities, its most useful role is to provide guidance to and
support for the firm’s managers.
• Lend Legitimacy
– Well-known and respected board members bring instant
credibility to a firm.
– Investors like to see new-venture teams, including the board of
directors, that have people with sufficient clout to get their foot in
the door with potential suppliers and customers.
– Board members are also often instrumental in helping young
firms arrange financing or funding.

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8.3 Rounding out the Team: The Role of
Professional Advisers
• Board of Advisors
• Lenders and Investors
• Other Professionals

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Board of Advisors (1 of 3)
• Board of Advisors
– An advisory board is a panel of experts who are
asked by a firm’s managers to provide counsel and
advice on an ongoing basis.
– Unlike a board of directors, a board of advisors
possesses no legal responsibility for the firm and
gives nonbinding advice.
– An advisory board can be established for general
purposes or can be set up to address a specific
issue or need.

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Board of Advisors (2 of 3)
– Many people are more willing to serve on a
company’s board of advisors than its board of
directors because it requires less time and there is
no potential legal liability involved.
– Like the members of a board of directors, the
members of a company’s board of advisors provide
guidance and lend credibility to the firm.

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Board of Advisors (3 of 3)
• Guidelines to Organizing a Board of Advisors
– A board of advisors should not be organized just so a
company can boast of it. Advisors will become
disillusioned if they don’t play a meaningful role in the
firm’s development and growth.
– A firm should look for board members who are
compatible and complement one another in terms of
experience and expertise.
– When inviting people to serve on its board of advisors,
a company should carefully spell out to the individuals
involved the rules in terms of access to confidential
information.
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Lenders and Investors
• Lenders and Investors
– Lenders and investors have a vested interest in the
companies they finance, often causing them to
become very involved in helping the firms they fund.
– Like the other nonemployee members of a firm’s
new-venture team, lenders and investors help new
firms by providing guidance and lending advice.
– In addition, a firm’s lenders and investors assume
the natural role of providing financial oversight.

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Table 8.5 Beyond Financing and Funding:
Ways Lenders and Investors Add Value to an
Entrepreneurial Venture (1 of 2)
• Help identify and recruit key management personnel.
• Provide insight into the industry and markets in which the
venture intends to participate.
• Help the venture fine-tune its business model.
• Serve as a sounding board for new ideas.
• Provide introductions to additional sources of capital.
• Recruit customers.

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Table 8.5 Beyond Financing and Funding:
Ways Lenders and Investors Add Value to an
Entrepreneurial Venture (2 of 2)
• Help to arrange business partnerships.
• Serve on the venture’s board of directors or board of
advisors.
• Provide a sense of calm during the emotional roller-
coaster ride that many new-venture teams experience.

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8.4 Other Professionals
• Other Professionals
– The other professionals that make up a firm’s new-
venture team include attorneys, accountants, and
business consultants.
• Consultants
– A business consultant is an individual who gives
professional or expert advice.
– Business consultants fall into two categories: paid
consultants and consultants who are available for free
or at a reduced rate through a nonprofit or
governmental agency.

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