MBA603 New Venture Capital Raising Assignment - Risks and Ethical Issues, Kaplan Business School, Australia
Questions - Identify and discuss the various risks and ethical issues to be considered when launching and/or investing in a start-up. In the first two parts, discuss the various risks and ethical issues to consider (a) as an entrepreneur, and (b) as an investor. Then, in Part Three, identify those that you think are the top three issues (inclusive) you need to give priority to when launching / investing in a start-up.
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Answer - New Venture Capital Raising
Entrepreneurship and start-ups play a crucial role in the development of the economy. The innovations that are being presented by through entrepreneurship presents further provision of development in the area of businesses (Drucker, 2014). Many investors are being attracted towards entrepreneurs with innovative ideas and proficiencies and they prefer to make investments in such entrepreneurial ventures only (Desiderio, 2014). A large part of the entrepreneur venture is based on the ethics that are associated with the area of business and there also remains certain risks associated with the launch of any start up or entrepreneurial venture (Barringer, 2015). Hence, the entrepreneurs as well as the investors are required to ensure that the associated risks are identified at the initial stage so that the same does not affect the business at the later stage. Furthermore, it is also to be ensured that the venture follows the ethics that are associated with the business or the industry and therefore, the entrepreneurs as well as the investors are required to keep the same under consideration. In the following discussion, the various risks and ethical aspects that are associated with start-ups have been elucidated. Furthermore, the case of Hyper Anna has been taken under consideration for the same.
Start-up Company Overview - Case Organisations
Hyper Anna is one of the leading start-ups that specialises in data analysts powered by Artificial Intelligence, that helps an organisation or an individual with different kinds of technical and tedious works of data analysis, code writing, chart production and other significant insights associated with data analytics. Hyper Anna enables an individual to ask questions in plain English regrading the key drivers of the businesses (Hyper Anna, 2019).
Tellius is a business analytics and intelligence software platform that is powered by Artificial Intelligence as well as machine learning, which amalgamates conversational search-driven analytics. The company aims at making data analytics accessible to everyone (Tellius, 2019). Tamr is yet another start-up that combines machine learning with the organisational knowledge of data in an easy-to-use as well as enterprise-scale system (Tamr, 2019).
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Risks / Risk Assessments (Part One)
Risks to be considered when launching
With respect to the launch of an entrepreneurial venture, the fundamental risks that are associated with it include the following.
1. Product Risk: Once the entrepreneur has decided the product or the services that are to be offered through the business, it is important to assess the feasibility of the product or services in the market where it is to be introduced (Ravi, 2014). This is supposed to be the topmost priority of any business venture as the success or failure of the venture is dependent on this factor. Furthermore, the entrepreneur is also required to be confident about the product or the services, as the further investments are based on the same (Ravi, 2014). In case of Hyper Anna, the AI powered data analytical tool will be responsible for providing highly valuable information based on which various strategies will be undertaken by the clients and users.
2. Execution Risk: Several entrepreneurs often become stuck in the details of the business and entirely lose focus of the overall corporate strategy and trajectory. Alternatively, some of the entrepreneurs and founders of the company remain at high level and thereby end up overlooking crucial and vital details that may eventually result in major problems (Ravi, 2014). The founders in Hyper Anna are looking at the use of AI technologies for data analytics, however, there lies a big question about identifying the trend based on the information and data. Furthermore there are associated risk of data confidentiality related in the process, which cannot be overlooked by the start-up firm.
3. Team Risk: There is high likelihood that the member of the team may not open up or be able to vanquish every risk. Therefore, it is important to ensure that the entrepreneur possesses effective leadership qualities so that they are able to efficiently manage the team and act as mentors, a confidante and if required, be a start up incubator so as to help the team members prepare for every challenge that may arise during the launch of the entrepreneurial venture (Ravi, 2014). Furthermore, there arise the issue of disagreement between the members of the team and therefore, the entrepreneur is required to provide all the team members with the necessary training and coaching regarding the venture as well as its strategic growth visions, so that all the team members can work in collaboration with each other. Being an entrepreneurial initiative, the management at Hyper Anna is required to offer the team members the opportunity to present their best and perform accordingly (Ravi, 2014).
Risks to be considered when investing
1. Investment Risks: There are various investment risks with respect to investing in the entrepreneurial venture. These include principal risk, returns risks, returns delay and liquidity risk. Investing in the start-ups puts the entire finances at risks. There are several situations where the venture may not be to succeed with the entrepreneurial plan that has been initially developed. Furthermore, there also remains the risks of not gaining the returns, as per the investments that have been made. Also, there may arise a delay in gaining the returns, which in turn is equally exasperating. Also, it is required to be ensure that there exists the provision of liquidity of the funds that have been invested on the venture (SeedInvest, 2016). For a start-up firm like Hyper Anna, it will be difficult to arrange for loan and other investment from financial institution, due to the lack of proven business track records and performance metrics.
2. Security Risks: The major safety risks that are associated with investing in an entrepreneurial venture include instrument risks, dilution, minority stake and valuation risk. Start-up enterprises may require additional capitals in the future and therefore, the investors may experience security issues due to the same. Securities are treated less preferentially as compared to the larger security holders. The price that the investors pay for the ventures may have materialistic impact on the eventual return (SeedInvest, 2016). As explained previously, the security for the information and data, on which the analytical tools of Hyper Anna will be working, require high layer of firewall and securities, besides abiding by various data and information related regulations.
3. Business Risks: The various business risks associated with investing in entrepreneurial venture include failure risks, revenue risks, funding risks, disclosure risk, personnel risks, fraud risks, lack of professional guidance, growth risk, competition risks, market demand risk, and control risk (SeedInvest, 2016). The field of advanced data analytics involves high established players like IBM, Google, etc., due to which the small start-ups like Hyper Anna will be experiencing intense competition, be it related to availing clients, or hiring skilled workforce.
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Ethical Issues (Part Two)
Ethical issues to be considered when launching
There are ethical issues that are to be considered when launching any entrepreneurial venture. These include the following.
1. Lack of infrastructure: Any large organisation that has been operating for several years and has also recruited a Corporate Compliance Officer (CCO) through additional budget along with dedicated staff and monitoring authority, can endeavour in an organized style for ethical compliance (Rashmi, 2018). However, with respect to the start-ups, they do not have the provision of analogous framework within which they are to address the ethical issues in challenges and business. The entrepreneur may get subjected to or encounter ethical issues due to the overwhelming roles and responsibilities associated with the business processes (Rashmi, 2018). Being limited in the financial and human resource aspect, Hyper Anna needs to focus on processing majority of their business progressions over cloud and online technologies, depending on freelance and outsourcing firms, during heavy work flows or projects involving higher number of workforce. Eventually the information or data on which the company will be working also becomes less confidential and more vulnerable thus doubting on the business ethics of the new start-up.
2. Desire for achievement: An entrepreneur may decide on starting a new organisation as they believe in their own concepts regarding the new products or technology or services (Rashmi, 2018). There lies the commitment and passion for the idea and the attitude to never give-up fighting and learning through what the others may observe to be a failure. It requires strength and courage to stand-up and thereby forge route for new ideas. It demands stern sacrifice of one's energy, money and time, which is all taken away from the family and friends of an (Rashmi, 2018). Nonetheless, along the pathway, eventually pressures mount and the owners of the enterprise might look for fast-track or shortcuts methods for achieving the same level of success, without realizing that the entrepreneur is about to make a bad ethical decision.
3. Societal and cultural impact: Entrepreneurship, at the societal level, significantly impacts the kind of lives the general population would lead in the impending future. The extent to which the livelihood of the public is moulded by various market activities, vicissitudes in the means the population would live, are also thereby, driven by the entrepreneurs. These visionaries, thereby, are able to create and commercialise novel goods and amenities for which there has, previously been, no market (Rashmi, 2018). This aspects is likely to have an impact on the business of Hyper Anna, being liberal at its business approach.
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Ethical issues to be considered when investing
1. Bargaining power: The venture capitalists that are providing capital or findings to the organisations that are fairly seeking money from the investors. To that fact it can be added that the venture capitalists are considered to be as industry insiders who are typically seasoned, whereas the entrepreneurs who have been seeking funds might never have associated with business earlier at all (MacDonald, 2010). Consequently, there arises an apprehension that the venture capitalists are often able to levy circumstances that are extremely beneficial to themselves, however, would be much less favourable for the entrepreneur (MacDonald, 2010), especially while investing in newly developed start-ups like Hyper Anna.
2. Information: The organisations the venture capitalists invest in are archetypally recent start ups and customarily all they have within their organisation insufficient number of nifty people and the skills that they possess, along with what are required by them to present great ideas. For justify the investments, venture capitalists engross in a rigorous procedure of due assiduousness, fundamentally insisting on a level to be able to access various information that are otherwise reserved for insiders. Although at times they are required to sign the non-disclosure agreements, however, sometimes they do not do so (MacDonald, 2010). Consequently, the venture capitalists end up gaining various confidential information about the businesses they are actually investing in, as well as about the corporations they have been consider investing in, along with some other venture capitalists who would be looking at proposals obtained from numerous hundred firms annually. This elevates apparent risks associated to confidentiality, the protection of intellectual property as well as insider trading (MacDonald, 2010).
3. Short-termism: The time-span for venture capitalists is comparatively short. The investments made by them, characteristically take the form of currency in exchange for shares (which are habitually favoured shares) within the business. Fundamentally, the idea is to foster the corporation through the early-stage budding troubles, assist it to develop into a business that can either become public (through the IPO) or be purchased out by a larger, richer firm (MacDonald, 2010). Stereotypically, venture capitalists cash out within 3-5 years. Furthermore, if the processes have gone fine, they tend to secure a very substantial profit. Consequently, the venture capitalists have quite a short-term interest in those corporations where they have invested in. They really overhaul regarding growth of the business, making a profit from it, and getting out of it, with numerous start-ups being established and shut down in the similar field of IT , as that of Hyper Anna. They are characteristically realised as partaking very slight attention in the long-term welfares of workforces or the other stakeholders (MacDonald, 2010).
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Top Three Risks / Ethical Issues (inclusive) [Part Three]
Based on the discussion that has been presented above, the major three issues that can highly affect the entrepreneurial venture launch as well as the investments associated with the same, the following three are the major risks that requires considerations and further discussion.
1. Product Risk: The entrepreneur is required to ensure that the product or the service address a big market and is introduced within the market at the right opportunity and at right time. It is imperious to conduct proper research and analysis so as to gain the landscape of the market and be able to clearly articulate how the business or the operations fit within the context of the business landscape that has been determined.
2. Execution Risk: With respect to the early stages of the business or entrepreneurial ventures, a dichotomous approach to assess the details ensures that the highest likelihood of the long term success in the development of the great organisation. It is highly important to ensure that there exists a balance between being a strategist with similar such high valued views and being a micro manager.
3. Lack of infrastructure: The lack of proper infrastructure with respect to any organisation is of high significance as these forms the foundation of the venture and therefore, it is highly essential to ensure that there is proper infrastructure that aids in the development of the foundation of the organisation. Furthermore, if appropriate infrastructures are not used in an effective manner then the same has the ability of affecting the overall organisational processes, thereby affecting the ethical aspects associated with the businesses.
Various risks and ethical issues may arise during the launch of an entrepreneurial venture and therefore, it is important to conduct a thorough analysis of the market as well as the business prospect prior to initiating the venture so that suitable mitigation solutions can be developed. Furthermore, it is important for both entrepreneurs as well as investors to ensure that all the aspects have been cleared at the initial stages, so as to avoid any kind of obstruction at the later stages.
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