Entrepreneurial Challenges Experienced by New Ventures - Essay Example

Analytical report Name: College: Course name/number: Professor’s name: Assignment number: Date: Analytical report Many of the companies that we see today started as individual or familial startups, which later grew into large firms. While some of these firms have ventured into the international market and even become public enterprises, some of them are still under the control of family members who hold significant stock therein. According to Kachaner, N. Stalk, G. & Bloch, A. (2012), family controlled firms contribute 30 % of all the sales of companies that exceed 1 billion dollars in the world, with some of the firms including the Tata Group, Samsung and Walmart, among many others. Notably, family controlled businesses are prevalent in Middle East countries, in which they contribute approximately 60 % of the GDP of these countries and employ over 80 % of the workforce therein as well. In addition, many Middle East family firms manage franchises of large international corporations. Unfortunately, for the startups in United Arab Emirates, 95 % of them were owned by expatriates (Arabian Gazette, 2015). The ensuing report delves into the entrepreneurial challenges experienced by new ventures, especially those undertaken by new family businesses, and the sources of finance that are available for family startups including their advantages and disadvantages Entrepreneurial challenges The entrepreneurial challenges emanating from new ventures particularly in family business include funding, ambiguous legal frameworks, bureaucracy, and skill deficiency. Perhaps the largest challenge faced by new ventures in many new family businesses is funding, both in access and in amounts (Arabian Gazette, 2015). Financiers such as banks find family businesses as high-risk undertaking, and therefore, they provide stricter loaning conditions to family businesses. In addition, while it can be acknowledged that various business-financing vehicles have emerged recently, such as crowd-funding platforms, angel investment networks, venture capital funds and business accelerators, the financing they avail are often insufficient for the new ventures and thus require supplementation. Legal frameworks in place in many Middle East countries pose a challenge to startup entrepreneurs because of their ambiguity and difficulty in understanding. Indeed, many owners of family business find the registration and licensing requirements complicated, unclear and lengthy as well. In these countries, limited or no information is available online, and therefore, one has to go physically to the relevant institutions, with offices providing ambiguous and incomplete information. Indeed, a business owner may need the help of someone familiar with the system in order to navigate through these processes. Worse still, these regulations, law and requirements are employed and enforced subjectively, meaning that different individuals may be treated differently by the authorities, often based on the depth and closeness of relations with those in authority. The case of Al Habtoor Group is illustrative of how the close relationship between the company’s owner, Khalaf, and Mohammed, a member of the Al Maktoum ruling royal family in Dubai in the United Arab Emirates, lead to favorable treatment of the company, particularly in accessing government contracts (Al Habtoor, 2017). Sometimes the regulations, law and requirements related to business and taxation can change without notice or at short notice, making planning difficult. A family business may have insufficient skills and competencies among the business owners, which may challenge their engagement in new ventures. In other words, the owners of the family firm may not have any formal business education and therefore may lack skills and competencies required to run a modern business venture. Skills that may lack include strategic planning skills, decision-making skills, financial literacy skills, negotiation skills, and communication skills among others (Aldrich & Cliff, 2003). The difficulties that these entrepreneurs experience for lack of these skills include the inability to make sound decisions and strategic plans, which may lead them to opting for unsuitable ventures. Entrepreneurs may also face difficulty when negotiating with partners, financiers, and suppliers as they engage in new ventures. Specifically, the entrepreneurs may be handicapped in pitching their ideals effectively in front of financiers and investors, thus being able to access funding for the new ventures. As such, these entrepreneurs may lose the opportunity to make deals that are beneficial to their firms, which might lose their firms money in the long term, or deny the firms the opportunity to expand and grow. These challenges may be compounded if the only skilled owner of the startup is indisposed (Sharma, Chrisman & Chua, 1997). In the same breadth, the family businesses may experience numerous challenges in accessing talented and highly skilled staff from the labor market. On one hand, these firms may be unable to attract skilled workers due to the inability to remunerate them in a manner commensurate to their skills because the entrepreneurs do not have sufficient finances or are not yet well established to offer anything else. As such, they may be unable to convince talented and skilled workers to leave lucrative corporate positions to join a new venture that is just starting up. On the other hand, the startup firms may experience logistical challenges that are involved in accessing foreign workers, who may be cost friendly. Logistical challenges include securing of work permits and visas for the foreign workers, and even accessing foreign workers with the required skills. Often, outsourcing of labor in an expensive undertaking for a family-based startup, which may lack sufficient funds and even networking to engage expatriates. Sources of finances Entrepreneurial startups have a variety of financial sources for funding their business ventures, which include personal savings, loans from family members and relatives, loans from banks, and seed money from investors and governments. Using personal savings has the advantage of improving business planning and execution due to the fear of loss of personal finances and the incentive of retaining all the benefits accrued from the successes of the business subsequently. Using personal finances also provides complete control over the business and all the activities and processes therein (Zellweger, Nason & Nordqvist, 2012). The business owner can engage in a business of his or her choice and passion, decide speed of reaching the breakeven point and subsequently the size of profits to be made thereafter. However, the downside of personal financing is the risk if entering into personal debt and even bankruptcy, which can lead to lifelong misery of the business owner. In addition, personal finances tend to limit the size of business one can engage in because they may not be enough for large ventures. Finances from family and friends are also commonly employed as startup capital, particularly in the Middle East family businesses. Parents and uncles, especially, are common financers of business ventures of their sons, daughters, nieces and nephews as well. The advantage with this approach is that one can access large amount of finances at virtually no interest and no remission period limit. Unfortunately, this approach may strain the relationship among family members particularly upon business failure or failure to honor agreed payments (Aldrich & Cliff, 2003). Loans from banks and other financial institutions can avail large amounts of finances for family startups particularly if the loans can be supported by collateral. In addition, a good relation with a banker may lead to access to more favorable loan conditions in future, which can help facilitate growth of business in future. Unfortunately, bank loans levy interests, which may be expensive to the startup over time. In addition, default may lead to bankruptcy of business and even its closure, which can sometimes lead to loss of personal property and collateral used as well. Finances from investors and the governments in form of seed money, development funds, and new venture funds among others are accessible to family owned businesses that are able to place their business cases successfully (Orient Plant Research, 2016). The advantage of these funds is that they come with technical assistance from the funding organizations, which helps the new ventures better absorb and utilize the acquired finances. In addition, these funds come with friendly conditions to the new venture, which are dependent with the nature of the venture, the business environment and the negotiation by the business owner. However, the challenge to new ventures is that one needs to know about them, apply for them and convince the financiers as well. family startups may not be well networked to obtain such information, may lack the technical capacity rewired at the pitching stage and thus may be unable to convince the financiers on their ability to utilize the funds well. Conclusion Family startups, particularly in the Middle East, face various challenges although many of the most successful companies in the region are family owned. Startups that are associated with the royal families are particularly advantages over those that are not, because of the better access to startup capital and finances thereafter, preferential treatment by the regulating and legal authorities, and better access to government-funded contracts, which facilitate organizational success and growth. As such, for startups whose owners are not affiliated to the ruling monarchies, the challenges they experienced include lack of funding, because they often resort to personal savings or help from family and friends, which may be sufficient to finance the ventures. In addition, the firms experience logistical challenges emanating from bureaucracy during registration and licensing, ambiguity in the laws and regulations, and even during processing visas and work permits for foreign workers to supplement the skills that may be lacking in the firms. References Al Habtoor (2017). Official website. Retrieved 26 May 2016 from http://www.habtoor.com/en/. Aldrich, H. E., & Cliff, J. E. (2003). The pervasive effects of family on entrepreneurship: Toward a family embeddedness perspective. Journal of Business Venturing, 18(5), 573-596. Arabian Gazette (2015). Funding most challenging for UAE entrepreneurs. Arabian Gazette. Retrieved 26 May 2016 from http://www.arabiangazette.com/funding-most-challenging-for-uae-entrepreneurs/. Kachaner, N. Stalk, G. & Bloch, A. (2012). What you can learn from family business. Harvard Business Review. Retrieved 26 May 2017 from https://hbr.org/2012/11/what-you-can-learn-from-family-business. Orient Plant Research (2016). The future of Arab startups: challenges and opportunities in a connected world. Retrieved 26 May 2016 from http://sites.nyuad.nyu.edu/nyuadstartad/wp-content/uploads/2017/04/Startups-in-the-Arab-World.pdf. Sharma, P., Chrisman, J. J., & Chua, J. H. (1997). Strategic management of the family business: Past research and future challenges. Family Business Review, 10(1), 1-35. Zellweger, T. M., Nason, R. S., & Nordqvist, M. (2012). From longevity of firms to transgenerational entrepreneurship of families: Introducing family entrepreneurial orientation. Family Business Review, 25(2), 136-155. Read More