Part 4 (Chapter 13, 14, 16)

Question 1

What are the important legal and regulatory aspects for entrepreneurs to consider in the Asia Pacific?

Answer 1

1) How easy it is to start a business
2) Licensing and permits
3) Local labour regulations
4) Property laws
5) How easy it is to get credit
6) Investor protection
7) Paying taxes
8) International trade

Question 2

Give an example of (1) how easy it is to start a business

Answer 2

Ranges from country to country. NZ is the easiest to start a business in the Asia Pacific, taking only one day. Australia is in second place with about two days. In Brunei it takes around 101 days to start a business.

Question 3

Give an example of (2) Licensing and permits

Answer 3

Asia Pacific is very regulated in terms of obtaining license/permits. E.g. In China it takes around 336 days and costs almost six times the annual income to obtain a license.

Question 4

Give an example of (3) Local labour regulations

Answer 4

The best way to encourage job creation is through flexible work hours and term contracts, ease of contracting workers and ease of hiring and firing. In this aspect, Singapore and Hong Kong are leaders. Another cost to consider for entrepreneurs is the cost of firing someone (severance pay). Many Asian countries perform poorly in this aspect (217 weeks of severance pay by the company located in Sri Lanka compared to 0 weeks pay in the US).

Question 5

Give an example of (4) Property laws

Answer 5

Entrepreneurs tend to thrive in areas where property laws are predictable (e.g In NZ it takes around two days to complete the property registration process).

Question 6

Give an example of (5) How easy it is to get credit

Answer 6

One of the greatest obstacles, especially for women. A good credit information regime is essential for both the debtor and the creditor. Sing, Malay and HK have a very efficient and transparent legal rights index. In AU and NZ, private credit bureaus cover 100% of adults.

Question 7

Give an example of (6) Investor protection

Answer 7

Entrepreneurs require regulation which allow them to get funds from investors without the need of exercising daily control of the business. They need laws which prevent expropriation and expose it when it does occur. Thailand, China, Singa and NZ perform well in this disclosure aspect.

Question 8

Give an example of (7) Paying taxes

Answer 8

New Zealand has the easiest regime for the time it takes to prepare and file and pay for corporate income taxes. HK, Singapore and Pakistan are best in terms of total amount of all taxes payable by the business as a percentage of gross profit.

Question 9

Give an example of (8) International trade

Answer 9

Entrepreneurs who have the fewest required signatures and documents tend to export and import more. They also make it cheaper for exporters to operate. Red tape, inefficient customs and trade transport can force traders to stock more goods in their warehouse which can increase their stock holding costs. HK and Singapore perform well in this aspect with less time taken for traders situated there to access or deliver containers (6 and 5 days respectively).

Question 10

What are the types of IP Rights?

Answer 10

(1) Patents
(2) Copyright
(3) Trademarks
(4) Trade Secrets

Question 11

Describe and give an example of (1) Patents

Answer 11

Patents give an individual or a company legal protection in terms of usage and ownership of a product they invented.

This helps them incubate and protect their idea from competitors. However the time for a patent is limited to 20 years and does not guarantee if any other business’ patent is breached while filing a patent.

Example: Usually for innovative, tangible products along technological or scientific lines such as Vaccine.

Question 12

Describe and give an example of (2) Copyright

Answer 12

Provides protection against intellectual or creative properties.

Patens have a longer life for about 50-70 years and gives the owners’ exclusive rights to produce and distribute their ideas. However they cannot stop another business if the approach a similar idea in a different method.

Examples of types: Literary or creative items such as an artwork, sculpture, novel etc.

Question 13

Describe and give an example of (3) Trademarks

Answer 13

These offer protection to a distinctive mark, symbol or motto that resonates with a company and its products or services.

A company however cannot trademark terms which are generic to the industry.

Examples: Coca Cola & Apple logo

Question 14

Describe and give an example of (4) Trade Secrets

Answer 14

Business processes that cannot be patented or the business does not wish t

Example: Coca Cola Formula

Question 15

What doesn’t qualify for Trade Secrets and can they be protected by the law?

Answer 15

Patenting requires the information be made public which can be a problem for a business especially if that source is of competitive advantage. Often the criteria in which the idea or ingredient falls does not have any proper legal protection for which businesses choose to keep it a secret instead.

Trade secret by law: Not possible but prosecution may be possible in some cases if the information is stolen or leaked.

Question 16

What are the sources of capital?

Answer 16

(1) Debt Financing
(2) Equity Financing
(3) IPO
(4) Venture Capitalists
(5) Angel Investors
(6) Family & Friends
(7) Own Money
(8) Commercial Banks

Question 17

What is (1) Debt Financing and (2) Equity Financing?

Answer 17

Debt financing refers to borrowing with an intention of repaying back with interest and within a specific timeline.

Equity finance refers to Selling ownership in the venture and may involve diminishing the entrepreneur’s control. (IPO, private placements).

Question 18

What are the Pros and Cons of (1) Debt Financing vs. (2) Equity Financing?

Answer 18

Advantages of debt finance:

• Amount borrowed can vary according to your needs
• As long as it is repaid, it will not affect your ownership of the company
• control is not diluted
• timeline between friends and family can be relatively flexible compared to institutions such as banks.

Disadvantages:

• It creates debt obligation
• Interest will be charges- affecting profitability
• Collateral is usually required and banks will value your assets conservatively
• If you borrow from friends or relatives it can sour relations if the business fails

Advantages of Equity finance:

• Greater amount of finance achieved
• no need to pay for interest.

Disadvantage:

• Dilution of control in the firm which can hamper innovation
• Capital is usually only available in very large amounts
• It means ‘selling’ part of your business
• Venture capitalists expect high returns on their investments (at least 25% pa)
• Investors may require you to buy them out at a future point

Question 19

Give an example situation where debt might be chosen over equity financing.

Answer 19

debt better for fam & friends (pg. 262) Initial situation calls for debt finance to be the better option since going for equity might hamper the required growth and experimentation needed for a business and its idea to grow. However debt financing does have the trouble of loan repayment and relation troubles.

Question 20

Define (3) IPO

Answer 20

A corporation’s way of raising capital through the sale of securities on the public markets.

Question 21

What are 4 advantages of IPO?

Answer 21

SIZE OF CAPITAL AMOUNT: selling securities is one of the fastest ways to raise large sums of capital in a short period

LIQUIDITY: The public market provides liquidity for owners since they can readily sell their shares

VALUE: The marketplace puts value on the company’s shares, which in turn allows value to be placed on the corporation

IMAGE: The image of a publicly traded corporation is often stronger in the eyes of suppliers, financiers and customers

Question 22

What are 4 disadvantages of IPO?

Answer 22

COSTS: the expenses involved iwth a public offering are significantly higher than other sources of capital.Accounting fees and prospectus printing and distribution as well as cost of underwriting the shares, can result in high costs.

DISCLOSURE: Detailed disclosures of the company’s affairs must be made public. New-venture firms often prefer to keep such information private.

REQUIREMENTS: The paperwork involved with government regulations, as well as continuing performance information, drains large amounts of time, energy and money from management. Many new ventures consider these elements better invested in helping the new company grow.

SHAREHOLDER PRESSURE: Management decisions are sometimes short term in nature in order to maintain a good performance record for earnings and dividends to the shareholders. This pressure can lead to a failure to consider the company’s long-term growth and improvement.

Question 23

Define (4) Venture Capital and their objectives

Answer 23

Venture Capitalists are experienced professionals providing various financial services for new or growing ventures e.g. capital for start up and expansion, funds for market research etc.

Objectives: Venture capitalists usually tend to examine the feasibility of the business and are more concerned about ROI. (expect a return of 42% pa which is extremely high compared to banks, which have 6.5% pa).

Question 24

Define (4) Venture Capital and their objectives

Answer 24

Venture Capitalists are experienced professionals providing various financial services for new or growing ventures e.g. capital for start up and expansion, funds for market research etc.

Objectives: Venture capitalists usually tend to examine the feasibility of the business and are more concerned about ROI. (expect a return of 42% pa which is extremely high compared to banks, which have 6.5% pa).

Question 25

What are the 4 venture funding stages?

Answer 25

In the beginning, Entrepreneur uses own money and creative means through bootstrapping. Once they are done bootstrapping, they will proceed to venture funding stages.

1. SEED FINANCING: Provides initial funds for business concept to be developed. this includes product development and market research.
2. START-UP FINANCING: is where product development is completed and the market is trial-tested. Sales are still low and company needs one year or less of expense money.
3. EARLY STAGE FINANCING: is provided to companies that have completed the product development stage and test marketing well, but require additional financing to expand commercial manufacturing and sales
4. EXPANSION FINANCING: is provided when startup is poised to grow rapidly. The business is viable and is reaching break-even point. The funds may be used to increase production capacity, market or product development and/or provide additional working capital.

After they are done with venture funding stages, they will proceed to Late-stage funding which refers to pre-initial IPO where it gains endorsements from top VCs as a company prepares for IPO.

Question 26

Define (5) Angel Investors, where they fit in the mix and list 5 types

Answer 26

An angel investor tends to specialise in early-stage businesses. These usually tend to be wealthy individuals who expect lower valuations and more control.

Usually best for start-up stage.

(1) Corporate angels
(2) Entrepreneurial angels
(3) Enthusiast angels
(4) Micro-management angels
(5) Professional angels

Question 27

Describe the 5 types of angels

Answer 27

CORPORATE ANGELS: Senior managers who have been laid off with generous severances or went for an early retirement. The entrepreneur might try to tap on their expertise by asking to take on a key position e.g. business development strategist.

ENTREPRENEURIAL ANGELS: Individuals who own and operate highly successful businesses. They are willing to take bigger risks and make more investments because of their stable and usually substantial sources of income. Might seek a position in the board of directors but usually will not want any more involvement than that. Usually makes investment outside their area of expertise and prefers investing in only a handful of projects a at a time.

ENTHUSIAST ANGELS: wealthy, successful individuals usually above 65 years of age who find investment as a passionate hobby. Typically makes small investments and rarely want to be part of the management or the board of directors.

MICRO-MANAGEMENT ANGELS: Serious, self-made wealthy investors. Problem with these type of investors is they try to impose their own tactics of success on the start up, thinking that it will also work successfully. Do not seek an active management position however might ask for a place in the board of directors.

PROFESSIONAL ANGELS: Investors of different professions such as doctors, lawyers and engineers. They like to invest in companies they have some knowledge about. They rarely ask for a board seat but might be difficult to deal with especially if the business is going through a turbulent time period. They are likely to invest in multiple ventures at a time.

Question 28

What sources of funding fit what stages?

Answer 28

Idea development: Founders & family

Seed: Friends

Start-up: Angel

Early and Late Expansion: Venture Capitalists

Question 29

How does one self-fund through bootstrapping?

Answer 29

1. Build out allowances from landlords.
2. Vertical integration e.g. a distributor investing in their supplier in order to ensure adequate stock levels.
3. Professionals associated with the business e.g. law firms, advertising firms might often want to provide their services in exchange of stock share in the business.
4. White knights: having someone with better credits buying your product and selling it to others in exchange of a few percentage points per month. Rare to find and can usually be found through factoring companies.
5. Technical or professional expertise: similar to 3. However they will not entirely reduce the fee, rather discount it to as much as 50% plus equity.
6. Sell licenses or marketing rights: However should ensure too much of the rights is not sold in order to retain enough control for progress.

Question 30

How does one self-fund through bootstrapping?

Answer 30

1. Build-out allowances from landlords.
2. Vertical integration e.g. a distributor investing in their supplier in order to ensure adequate stock levels.
3. Professionals associated with the business e.g. law firms, advertising firms might often want to provide their services in exchange of stock share in the business.
4. White knights: having someone with better credits buying your product and selling it to others in exchange of a few percentage points per month. Rare to find and can usually be found through factoring companies.
5. Technical or professional expertise: similar to 3. However they will not entirely reduce the fee, rather discount it to as much as 50% plus equity.
6. Sell licenses or marketing rights: However should ensure too much of the rights is not sold in order to retain enough control for progress.

Question 31

How does one secure loans from Commercial Banks?

Answer 31

To secure a bank loan, they will typically ask 5 questions:

5 Questions asked by them

1. What do you plan to do with the money?
   - Do not plan to use funds for high risk ventures. Banks seek the most secure venture possible.
2. How much do you need?
   - Some entrepreneurs go to their bank with no clear idea of how much money they need. All they know is they want money.
3. When do you need it?
   - Don’t rush to the bank to immediately ask for money. Lenders steer clear of poor planners.
4. How long will you need it?
   - The shorter the period of time an entrepreneur needs the money, the more likely they are to get the loan
5. How will you repay the loan?
   - Does collateral exist?

Question 32

Provide some real-life examples of entrepreneurs funding their businesses.

Answer 32

1. Apple started out bootstrapping in their garage (using Jobs’ savings and Wozniak’s salary).
2. Indiegogo and Kickstarter are examples of two crowdfunding platforms.
3. Shows such as Shark Tank allow businesses to access angel investors and venture capitalists.