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Entrepreneurship and the Role of Innovation

Introduction

Entrepreneurship is the art of pulling together resources and business acumen as a way of transforming innovations into economically viable goods. Entrepreneurship is all about performing realistic business analysis and making a series of sound decisions concerning the business. Mark Pale and Jim Mack came up with a unique idea of localizing internet-based activities to optimize internet advertisements. This was different from what other internet businesses were involved in hence a good innovation. Implementation involved the pooling of resources by raising the required capital from investors and financiers. The case study shows the importance of proper decision-making in the continuity of the company. Wrong decisions regardless of the viability of the products is a recipe for failure (QuickMBA 2007 Para 2).

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Viability of Wall Street Venture Capital

The company had accumulated debt to the tune of $ 1 million, coupled with the requirement that the company would be charged a $20,000 commitment fee makes the deal unfavorable. After signing the deal, the company was expected to raise an additional $ 500,000 outside the Wall Street Venture Capital. This would definitely prove to be very difficult or even impossible mainly due to two facts. First, there was a bearish trend experienced in the stock markets for companies dealing in internet businesses worldwide. Since June 2000, the stocks had been falling meaning that few or no financiers will be willing to risk their funds in ventures involving internet businesses. Failure to raise this amount will be a breach of contract and this will lead to an even worse position for the company and the directors due to the litigations that may result. Secondly, the Venture Capital Company has very little information known about its background. Contracting with a largely anonymous entity may prove disastrous. A brief history of the firm’s previous success is always encouraging. Also, the firm may be relatively new to the American market and may not have fully internalized the American model of doing business. This being the case, consenting to the arrangement may not help to improve the firm’s position.

Burn Rate

Burn rate refers to how fast a company uses up cash. If the rate is high the firm is operating on unstable grounds and has to raise more capital or urgently reduce costs while increasing revenues else it goes out of business. Internet businesses have the burn rates high as they focus on expanding markets instead of being profitable (Michael 1998 p4).

It is the rate at which expenses incurred exceed the available resources.

The company had been incurring huge expenses yet revenues remained dismal. Only two franchises were signed in a whole year yet expenses continued to be incurred in developing new products, establishing partnerships and marketing franchises. By March 2001, the company had incurred over $200,000 in wages to its 175 employees. Even with the reduction of employees from 175 to 15, a monthly expenditure of $75,000 was still high compared to revenues earned.

Mistakes Done By Community Web

Community web management committed several mistakes that lead to its deteriorating financial position. First, the business plans were not developed for the purpose of guiding the firm but rather to impress investors. These over-estimated income projections led to investors lending even more funds to the company. This was the genesis of the debt crisis. Also, despite the constant changes in financial forecasts, the management never made alterations to the business plans. Business plans should always be up-to-date with the current situations facing the firm. Indeed, there were some major inaccuracies. Still, the firm’s historical financial statements were not audited. This led to difficulties in accessing funds from financiers.

Perhaps the most costly mistake made by the management was the constant change of goals. The management shifted from one business idea to the next without giving enough time to break even. The initial costs of developing, introducing and marketing new products are usually very high thus a new business idea should be given time to grow, break-even and lead to profits. The constant introduction of new products largely led to the financial crisis. As witnessed in the firm, the employees became alienated and lost focus as the goals of the organization kept shifting.

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The company’s management also ignored the Economic conditions prevalent during start-up. The economic environment refers to the conditions which are prevailing in the industry. During the start-up period there existed a lot of pessimism in the industry. Over 550 internet businesses had closed shop, the stocks had also taken a dive in the exchange market. This was the wrong timing to start an internet business firm.

Ethical and Legal Case

Ethics are principles and values which may be written or not used to regulate actions within a company. They are mainly determined by the cultures and norms adopted at the workplace and differentiate between good and bad. They are usually unique to a business or industry but there also exist business ethics applicable to all businesses. They are mainly to guide people on good business practices.

Two major ethical issues can be observed in the case of CommunityWeb. First, the preparation of financial statements with the aim of impressing investors is not ethical. It is misleading to the financiers. It is actually considered a form of fraud as it influences the financing institutions to base their decisions regarding lending on biased reports (Beekun and Yamamura 2003 Para 4).

Secondly, the disagreements between the two seniors Jim Mack and Dan Pale have been personalized leading to a situation where they cannot even meet eye to eye. This implies poor ethics as personal differences should not be dragged into business. As the senior managers, they should constantly meet and make decisions jointly as their investments are at stake. However, each should stick to his roles to avoid cases of collision. Moreover, the continual use of personal finances is not a sound business practice (Adrian 1999 Para 8).

Some legal issues also emerge in the case of CommunityWeb. Jim Mack never registered distribution of equities for private placement with the SEC. The SEC regulates the sale of stock to private parties. Regulation D has several rules outlining specific details. Rule 504 exempts some companies from registration with the SEC when they offer up to $1,000,000 worth of their stocks. The 2.3 million shares sold to investors had a higher value. Companies using this exemption should not be categorized as blank check companies (companies in the development stage and with no clear business plan of whose plan is to merge or acquire other entities) and is not required by the SEC At of 1934 to file reports. However, even if the company makes the private sale, it should still provide sufficient and accurate financial statements. The companies must however file Form D which is a brief notice including names and addresses of company owners and promoters (US Security Exchange Commission 2009 Para 3).

Rule 505 of the regulation enables some companies not to register with SEC on several conditions. First, the securities offered should not exceed $5 million worth in any one-year period. The sale can be made to unlimited number of accredited investors and a maximum of 35 others. The purchasers must also be informed that they cannot resell their securities without registration. They also cannot advertise the securities on sale (US Security Exchange Commission 2009 Para 5).

Rule 506 allows companies to raise unlimited funds on observing certain conditions. First they cannot advertise the securities. They also can only sell to a maximum of 35 unaccredited purchasers. They decide on the information to give so long as it is not fraudulent. However form D has to be filed with the SEC (US Security Exchange Commission, 2009 Para 6).

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Reasons for Problems encountered in market entry

The company experienced major difficulties in entering the market. Tony Baker was only able to sell two franchises in the first year of operation. This had lead to the strain in finances experienced at the company.

The main reasons for the difficulty in penetrating the markets are several. First the company was not very clearly focused on making the most important alliances. It made numerous partnerships which later proved to be useless. These involved wasted efforts and resources which could have otherwise been used wisely in making beneficial partnerships only.

There was also very stiff competition during the time of entry. Established internet businesses such as OneMain.com, MyCity.com, megago.com, Wowtown.com and DigitalCity.com offered a very competitive environment even though they were not as localized as CommunityWeb.com. Also, the timing of entry into the market produced several challenges. The industry was at the point of shrinking and the confidence was low hence convincing customers became a difficult task. In addition, the firm kept on shifting products offered not enough time and effort was placed at developing the already existing products before introducing new ones (Gertrude 2009 Para 4).

Reasons for difficulty obtaining financing

The firm experienced difficulties obtaining finance due to several reasons. First, the firm’s historical statements were not audited meaning that financial institutions could not rely on them as their truth and fairness could not be verified. Also the company had very dismal revenues compared to the expenses incurred which put off investors.

The industry was also at its lowest point and its future prospects not inviting. Having over 550 internet businesses close down in the year 2001 was enough reason for the loss of confidence.

Effectiveness of business Plan in raising capital

Business plans are comprehensive, well-documented literature developed mainly with two aims. First is to give investors a real valuation of the feasibility and risks involved in the business idea being conceived. Secondly, they provide the entire operations team which includes the management and employees with a clear guideline on the expected actions and reactions towards achieving the business’s goals (SmallBusinessOnlineCommunity 2009 Para 5).

The CommunityWeb business plan can be explained as a masterpiece. It starts by giving comprehensive information on the business idea and elaborates the key unique ideas to be implemented. It then stipulates the high qualifications of the management, personnel and associates to be incorporated in the business. The plan also gives a breakdown of the capital structure adopted by the firm. It continues to give the industrial background and a comprehensive market analysis as well as an evaluation of the competitiveness of the firm. Here, the firm portrays itself as the ideal company incorporating all the required features of an internet business. Clearly, the plan is overly ambitious but is very pleasing to investors (Michael 2009 Para 6).

The projections analyzed depict full profitability by the second year and a very high return in the third year. Any investor would be impressed by the projections of revenues and the planned expansion to even earn greater returns in the future. However, as later witnessed the plan was largely overestimated. Revenues and returns obtained did not come close to projections made. This is unethical and misguides the entire business decision-making process (Venture Associates, 2009 Para2-4).

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Conclusion

CommunityWeb is a good innovation that is viable and promising. The major impediment to its success is the improper decision-making and the setting of unrealistic goals. Partnering with the Venture Capital Company at this level of indebtedness and approaching legal suits may not lead to the desired turnaround expected. Moreover, the venture capital company is not well known and this may lead to further problems in future. The best decision at the moment is to file for bankruptcy.

Reference

Adrian, D., 1999. Social and Legal Concerns. Dependable Embedded Systems.Carnegie Mellon University. [Online]. Web.

Beekun, R., Stedham, Y. and Yamamura, J. 2003. ‘Business ethics in Brazil and the U.S.: a comparative investigation’. Journal of Business Ethics, 42(3), 267–279.

Gertrude, S., 2009. Getting finance. Business Owners Toolkit. [Online] Web.

Joyce, L., 2003. 5 Common Mistakes to Avoid When Starting an Internet Business. Business Start-up. [Online]. Web.

Michael, F. and Allan, E., 2005. The Abundance of Simple Business Models on the World Wide Web. [Online] 2009. Web.

Michael, R., 2009. Business Models On The Web. Managing The Digital Enterprise [Online] Web.

Michael, W., 1998. Burn Rate the complete review. [Online] 2009. Web.

QuickMBA, 2007. A Definition of Entrepreneurship [Online] 2009. Web.

SmallBusinessOnlineCommunity, 2009. Is there any way to obtain financing? [Online] Web.

US Security Exchange Commission, 2009. [Online]. Web.

Venture Associates, 2009. Business plans and Planning. [Online]. Web.

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