SmallBusinessManagement

ProfessorHornadayLecture4SmallBusinessSourcesof

CommercialCreditCommercialBankLoans-36%CommercialBankMortgages-25%FinanceCompanies-23%VentureCapital-10%SBALoans-6%Source:SBA,1996GoalsofGovernmentAssistanceEconomicGoalsIncreaseEconomicEfficiencyIncreaseEconomicGrowthProvideFinancingnotAvailablefromthePrivateSectorPoliticalGoalsProvideEmploymentIncreaseBusinessOwnershipNarrowIncomeGapProvideaForumforSmallFirms1995SmallBusinessAdministration(SBA)LoanPrograms504DevelopmentLoans-$2,5007(a)LoanGuarantees-$7,700SBICSeedMoney-$375Source:SBA,1996($millions)SBAGuaranteedLoansLenderofLastResortIndependentlyOwnedandOperatedNotDominantInFieldMax$500K,Average$175KSBAGuarantees85-90%ofLoanRequireCollateralandPersonalGuaranteesPrimeRate+2.75%for10-25YearsSource:SBA,19961995SBAGovernmentLoansUsedbyLessthan1%ofSmallBusinesses55,600LoansGuaranteedValuedat$9BillionDefaultRateof19%RisksofBankLending50%ofU.S.Start-UpsGoneafter3yearsBanksUseDepositorFundsforLoansBanksnotVentureCapitalistsLackofBankIndustryandMarketExpertiseBankTransactionCostsThe“5Cs”ofBankLendingCharacterCapacityCapitalCollateralConditionsSmallBanksLendtoSmallBusinesses

Source:WSJ,1996%ofSmallBusinessLoansOutstandingLoansin1995LargeBanks-$71.9BillionSmallBanks-$212.3BillionsSource:SBA,1996EarlyFinancingStages

NoRevenues,NoProfitsSeedExpansionLateStageHigherRiskLowerRiskConceptDevelopmentCommercializationInflowsintoUSVentureCapitalFundsSource:TheEconomist,2000Billions1995VentureCapitalSeedMoneySource:BusinessWeek,1996$MillionsCommunicationsInformation&SoftwareDistributionProductsHealthCareU.S.Start-UpVentureCapital1stQuarter2000Source:WSJ,2000BillionsVentureCapitalandtheInternetSource:WSJ1999BillionsIrreducibleUncertaintyInvestmentBhidé’’sInvestment-Uncertainty-ProfitDiagramNote:SizeofMoneyBag=PotentialProfitIrreducibleUncertaintyInvestmentPROMISINGSTART-UPS:MicrosoftBASICfortheAltair(1975)SamWaltonfranchisedvarietystore(1945)TRANSITIONALINITITATIVES:MicrosoftExcelfortheMacintosh(1985)Wal-Martdistributioncenters(1968-69)CORPORATEINITIATIVES:MicrosoftWindows95Wal-MartJVinMexico(1991)Bhidé’’sInvestment-Uncertainty-ProfitDiagramNote:SizeofMoneyBag=PotentialProfitIrreducibleUncertaintyInvestmentDistributionofSignificantInitiativesOpportunisticAdaptationRisktransfer/syndicationPersonalabilitiesResearchandplanningUnderwritingotherrisksTeamworkNote:SizeofMoneyBag=PotentialProfitCORPORATEINITIATIVESPROMISINGSTART-UPSIrreducibleUncertaintyInvestmentFiveArchetypalInitiativesMARGINALBUSINESSESLawncare,hairsalonPROMISINGSTART-UPSHewlett-Packard(1948)EDS(1962)VC-BACKEDSTART-UPSIntel,Lotus,Compaq,Staples,GenentechCORPORATEINITIATIVESWindows95,Pentium(Intel),MachIII(Gillette),Prozac(Lilly)REVOLUTIONARYVENTURES:FederalExpress,Iridium(Motorola)Note:SizeofMoneyBag=PotentialProfitProfessionalManagementMajorOutsideFinancingIrreducibleUncertaintyInvestmentStagesofFunding2ndSTAGEVCCisco(1987)BOOTSTRAPPEDSTART-UPSCisco(1984)VC-BACKEDSTART-UPSCompaq(1982)PUBLICMARKETSCisco(1990)Compaq(1983)Note:SizeofMoneyBag=PotentialProfitProfessionalManagementMajorOutsideFinancingIncrementalGoalsFirmSizeandMaturityGoals-AudaciousorIncrementalAudaciousGoalsPROMISINGSTART-UPSSurvivalCashFlowTRANSITIONALINITITATIVESJustifyInvestmentSecureResourcesPromoteCooperationCORPORATEINITIATIVESLimitedbyHistoryandSizeFormalPlanningFirmSizeandMaturityOpportunisticAdaptationorFormalPlanningOpportunisticAdaptationPROMISINGSTART-UPSExperimentationUnexpectedSituationsLimitedPlanningResourcesTRANSITIONALINITITATIVESJustifyInvestmenttoOutsidersCORPORATEINITIATIVESSystematicResearchPlanningResourcesCompeteforCorporateFundingFirmSizeandMaturityRisksFacedbyTopDecision