For this assignment, read the case study on pages 299 and 300 of the eTextbook. Once you have read and reviewed the case scenario
Please make sure that it is your own work and not copy and paste. Please read the study guide.
Please watch out for spelling and grammar error. Please use APA 7th edition. two pages length
Book Reference:Neck, H. M., Neck, C. P., & Murray, E. L. (2021). Entrepreneurship: The practice and mindset (2nd ed). SAGE. https://online.vitalsource.com/#/books/9781544354644
Case Study Daymond John, Founder, FUBU
For this assignment, read the case study on pages 299 and 300 of the eTextbook. Once you have read and reviewed the case scenario, respond to the following questions with thorough explanations and a well-supported rationale. Please apply feedback from previous units to this assignment.
- Differentiate between innovative bootstrapping choices and traditional financing strategies used by Daymond John. How did these choices support and hinder the success of his company?
- What other funding strategies could Daymond John have used for his venture? You can include funding strategies not available at the time he was starting his venture.
- In describing the business strategies used by Daymond John to support the venture’s resource needs, discuss the financial consequences of each decision.
- If you were starting this venture now, would you rather seek equity financing or debt financing? Why?
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Course Learning Outcomes for Unit VII Upon completion of this unit, students should be able to:
5. Differentiate innovative business strategies. 5.1 Describe funding strategies. 5.2 Differentiate innovative bootstrapping choices and traditional financing strategies.
6. Evaluate financial implications involved with organizational growth. 6.1 Contrast equity financing and debt financing.
7. Describe legal aspects of business growth.
7.1 Explain how decisions have financial consequences.
Course/Unit Learning Outcomes
Learning Activity
5.1
Unit Lesson Chapter 12 Chapter 13 Article: “How Do Entrepreneurs Obtain Financing? An Evaluation of Available
Options and How They Fit into the Current Entrepreneurial Ecosystem”
Unit VII Case Study
5.2 Unit Lesson Chapter 12 Unit VII Case Study
6.1
Unit Lesson Chapter 12 Chapter 13 Unit VII Case Study
7.1
Unit Lesson Chapter 13 Student Resource: Defining Equity Financing Unit VII Case Study
Required Unit Resources Chapter 12: Bootstrapping and Crowdfunding for Resources Chapter 13: Financing for Startups In order to access the following resources, click the links below. Wright, F. (2017). How do entrepreneurs obtain financing? An evaluation of available options and how they fit
into the current entrepreneurial ecosystem. Journal of Business & Finance Librarianship, 22(3/4), 190–200. https://doi-org.libraryresources.columbiasouthern.edu/10.1080/08963568.2017.1372011
UNIT VII STUDY GUIDE
Venture Growth and Financial Implications
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Navigate to the Video and Multimedia area in Student Resources for Chapter 13 of the eTextbook to view the item listed below.
• Defining Equity Financing
Unit Lesson
Funding Choices Bootstrapping is the idea of starting a new venture without funds or looking for approaches that support the resource needs of the new venture with limited funds. Examples of bootstrapping include working out of personal space like a home, apartment, or garage or using resources that are not used to their full capacity by the owner of the resources. An example is using a grade school kitchen on weekends to build a food-related business. Bootstrapping requires creativity in thinking about how to gain access to resources when personal funds are limited. Crowdfunding and crowdsourcing can also provide access to resources. Other than bootstrapping, there are two primary approaches to funding your entrepreneurial venture: debt financing and equity financing.
Debt Financing Debt financing relates to acquiring debt (borrowing money) with a payback timeline established by the lender. This could be a bank loan, a loan from a family member, or some other source of borrowed funds. Debt financing, in most cases, requires an established repayment plan, payment of interest, collateral, and meeting the conditions for receiving the loan. If receiving a loan from a family member, these terms might be more lenient, although it is a good idea to create a formal document to avoid misunderstandings between family members. From an entrepreneurial perspective, there are a few negatives related to debt financing. If borrowing from a financial institution, the bank will want collateral. Since your venture will most likely not have a track record of generating an income and banks have a fiduciary responsibility to protect their depositors’ funds (a bank’s business model is to accept deposits and loan those deposited funds out to other individuals), a bank is risk- averse. This means that if the bank loans the entrepreneur money, the loan is based on traditional terms including treating the entrepreneur as an individual who wants to borrow money, rather than approaching the loan as a loan to the business. The bank will typically not want to become involved in the new venture as the new venture does not have a performance track recourse. Banks prefer low-risk loans and will consider the borrower’s character, credit score, repayment ability, and the quality of the collateral. The repayment plan is based on the entrepreneur’s established income. Many entrepreneurs continue their traditional employment while working on their new venture. This traditional employment and related income position are what the bank will consider regarding your ability to repay the loan. The repayment plan means these repayment funds are not available to invest in your new venture, although the borrowed funds are used in building the new
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venture. Taking these regular payments that are owed to the bank out of your monthly cash flow is a financial consequence of the decision to use debt funding; this decision can be a burden to the success of the venture. Another negative is the assignment of the asset as collateral for the loan. Careful consideration is needed to foresee if the collateral could be better used in another manner and contemplate the worst-case scenario that the collateral is reposed in the event of failure to repay the loan. This financial decision's consequence could potentially mean the loss of your home if the home was mortgaged to borrow money to support the entrepreneurial start-up. A third negative financial consequence relates to the payment of interest, as the money paid in interest is also money that cannot be used in starting the venture. If borrowing funds from a family member, collateral and interest might be disregarded, although the family member might require these conditions. Specifically identifying the terms and conditions of the transaction is important. Let’s say the venture is wildly successful, and the family member that loaned you money now says the loan was really an equity investment and now the family member wants an equity share in the profits. This means that the family member wants percent ownership in the new venture rather than the payback of the originally loaned money. Consider if the opposite happens, where the venture is a complete failure, and you want to pay the family member back with monthly payments, but the family member wants repayment at the news that the venture is unsuccessful. In either situation, the financial consequences of these decisions can be daunting. Clearly stating the terms and conditions that both parties agree to is important to avoid family conflict. Another consideration is how other family members understand the transaction. Creating a formal document alleviates tensions within a family and avoids concerns of favoritism or other emotions and interpretations of the transaction.
Equity Financing Equity financing is when someone invests funds into the venture in return for an equity stake in the venture. An equity stake means that the person investing the funds is now part-owner of the venture—the person has an equity stake in the venture. The terms for this arrangement should also be formally established. The negative financial consequences connected with debt financing are removed when using equity financing. There are no collateral, interest, or repayment terms. Instead, the investor receives payment through a return on investment (ROI) either from future equity financing rounds, such as the entry of venture capitalists (VCs), or when payment is received when the venture is sold to another company. VCs step in to fund the venture at larger dollar amounts, generally paying off the original investor based on the valuation of the venture at the time the VCs purchase equity in the venture. The expectation from an angel investor’s perspective is to invest in the venture and realize a significant ROI within a short timeline. A common mistake that new entrepreneurs make is to accept equity funding from the first person who offers money. Instead, taking the time to find the right person can provide greater benefits than the invested dollars. Let’s first explain what an angel investor is, then address the benefits beyond money that angel investors provide to the funded entrepreneur. An equity investor in an entrepreneurial venture is called an angel investor. The name angel investor comes from the world of financing theatrical productions in the 1800s. The cost to produce a theatrical performance was significant and risky as the production could be well received and, therefore, financially successful or poorly received, thus amassing debt. Angel investors were the people who were willing to invest in the production with the hope that the production would be successful, and the angel investor would receive a sizable return on their invested funds. Due to financial risks, traditional lenders were unwilling to loan money to the theatrical group to produce the play. In the entrepreneurial world, the name angel investor represents a wealthy individual who is interested and willing to invest in the entrepreneur and the venture. Angel investors are typically people who have previously acted as an entrepreneur, harvesting their venture for a sizable return, and now have an interest in helping other entrepreneurs. With this previous experience as an entrepreneur, the knowledge gained through the angel investor's experiences becomes a significant resource and benefit to the funded entrepreneur. This is why it is so important for the entrepreneur to take the time to find the right angel investor. Finding an angel investor who has the experience that transfers to the new entrepreneur’s needs provides a plethora of benefits such as making contacts with other people who can provide guidance and support through accessing the angel investor’s network and making better decisions based on the angel investor’s
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experience and knowledge. Finding the right angel investor is a bit easier than it was in the past as most communities now have events where entrepreneurs can meet and present their ideas to angel investors. When the venture grows to the point that larger sums of equity funding are needed, that is the point at which venture capitalists become involved in adding larger equity dollar amounts to support the venture’s growth. The angel investor can also guide this process; another example of how an angel investor’s knowledge can be worth more than the invested dollars.
Grant Funding A third possibility is grant funding. Grant funding is neither a debt funding method nor an equity funding method because the grant is not paid back unless the terms of the grant are violated nor is any equity in the venture assigned to the grantor. Grant funding requires searching for an appropriate grant, applying for the grant in a competitive process and, if receiving the grant, complying with the conditions of the grant. Complying with the conditions of the grant means that not only are the conditions of the grant fulfilled correctly but tracking these conditions is also required. The process of searching for an appropriate grant takes time, as does the documentation required as part of the conditions in the grant application and reporting process. Some companies conduct the search for an appropriate grant and provide assistance in completing the application process on a fee-based payment system, a possible option if the venture has components that might fit within a grant-funded situation, especially if the venture is a social benefit-based idea.
Financial Knowledge Understanding basic financial statements is important in managing the new venture, especially the cash flow statement. Cash is king is a common phrase in the entrepreneurial world because if the entrepreneur runs out of cash, no matter how great the potential is for this venture, the potential for success is compromised. Keeping a close eye on the cash position of the venture is essential for the success and viability of the venture. In writing the business plan, financial projections are created to assist in thinking through various decisions. For example, how much of an increase in production costs can the venture sustain, and how would a price increase impact the projected cash flow statement? This is just one example of why understanding the financial statements and related decisions are essential for the success of the venture.
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All financial decisions have consequences; some consequences are good, other financial decisions can be challenging to recover from. Considering the consequences of these decisions is well worth the time and should be reviewed before starting the venture. The right financial decisions can result in supporting the successful creation of the entrepreneurial start-up.
Interactive Activity
In order to check your understanding of concepts from this unit, complete the Unit VII Knowledge Check activity. Unit VII Knowledge Check PDF version of the Unit VII Knowledge Check Note: Be sure to maximize your internet browser so that you can view each individual lesson on a full screen, ensuring that all content is made visible. Remember, this is a nongraded activity.
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Suggested Unit Resources Supplement A: Financial Statements and Projections for Startups In order to access the following resources, click the links below. The article below provides an overview of innovative approaches for entrepreneurs seeking financial support. Bonini, S., Capizzi, V., & Cumming, D. (2019). Emerging trends in entrepreneurial finance. Venture Capital,
21(2/3), 133–136. https://doi- org.libraryresources.columbiasouthern.edu/10.1080/13691066.2019.1607167
The following article includes information on early-stage finance resources for entrepreneurial ventures including incubators, accelerators, science and technology parks, and other options available to support the entrepreneur’s needs for start-up funds. Bonini, S., & Capizzi, V. (2019). The role of venture capital in the emerging entrepreneurial finance
ecosystem: Future threats and opportunities. Venture Capital, 21(2/3), 137–175. https://doi- org.libraryresources.columbiasouthern.edu/10.1080/13691066.2019.1608697
The following article includes information about online crowdfunding and the most success factors for funded projects through Kickstarter.com. Kromidha, E., & Robson, P. (2016). Social identity and signalling success factors in online crowdfunding.
Entrepreneurship & Regional Development, 28(9/10), 605–629. https://doi- org.libraryresources.columbiasouthern.edu/10.1080/08985626.2016.1198425
Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. In order to access the following resources, click the links below. Utilize the following Chapter 12 Flashcards and Chapter 13 Flashcards to review terminology from the eTextbook.
- Course Learning Outcomes for Unit VII
- Required Unit Resources
- Unit Lesson
- Funding Choices
- Debt Financing
- Equity Financing
- Grant Funding
- Financial Knowledge
- Interactive Activity
- Suggested Unit Resources
- Learning Activities (Nongraded)
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Tiffany,
Good paper! You covered the key elements of the assignment. I encourage you to work on writing mechanics and clarity, using APA paragraph headers, and using more peer-reviewed sources. All else is good!
Professor Harris
Case II Study case feed back
Case IV Study case feed back
Good paper! You covered the key elements of the assignment. I encourage you to work on writing mechanics and clarity, using more peer reviewed sources, and APA paragraph headers to better organize your work. All else is good!
Professor Harris
Case Study V feedback
Good paper! You covered the key elements of the assignment. I encourage you to work on writing mechanics and clarity, using more peer reviewed sources, and APA paragraph headers to better organize your work. All else is good!
Case VI Study case Feed back
Excellent paper! You covered the key elements of the assignment. I encourage you to work on writing mechanics and clarity and use more peer-reviewed sources for support. All else is good!
Professor Harris
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Case Study Daymond John, founder, FUBU
FUBU is an American hip-hop apparel company started in 1992 by Daymond John, a current investor on Shark Tank, along with Keith Perrin, J. Alexander Martin, and Carl Brown. FUBU currently sells T-shirts, rugby shirts, hockey and football jerseys, baseball caps, and accessories, all embroidered with the now-popular FUBU logo.
Daymond John grew up in the heart of a thriving hip-hop culture in an area of Queens, New York, called Hollis. Also out of the Hollis neighborhood came hip-hop legends such as Russell Simmons, LL Cool J, and all three members of Run-DMC. Daymond had a love for hip-hop and the culture that surrounded it, especially the clothes. Daymond explained how the idea for FUBU was sparked. “We started to hear rumors that clothing companies, apparel companies did not want rappers, African Americans, inner-city kids, anybody wearing their clothes. I started to get fed up hearing about all these types of brands and I wanted to create a brand that loved and respected the people that loved and respected hip-hop, and I called it FUBU: For us by us!”
Daymond tested and experimented with his concept from 1989–1992. He printed a few “FUBU” labels and attached them to Champion-branded T-shirts that he bought off the rack from local retailers. He wore the T-shirts himself to see if people noticed. He also tested a hat concept. He noticed that many rappers were wearing a particular kind of hat. It was a type of ski cap with a small piece of shoestring on top. These hats were mostly sold by street vendors for $20. He thought he could do better, so he bought $40 worth of fabric. He stitched 80 hats together, added the FUBU labels, and tried to sell them for $10 on a street corner outside a local mall. He sold out in 3 hours and made $800.
He was the consummate bootstrapper, and the word about FUBU started to spread around town. He started selling more and more hats and soon added T-shirts to his product line. He approached retail booths outside the malls whose street corners he would stand on and asked them to sell his goods on “consignment” for him. “I was trying to figure any and every way out that I can to increase my sales!” He was sourcing his T-shirts from companies that would provide high=quality T-shirts with no brand name. He would then sew or screen print or even embroider his logo on the T-shirt and sell it. While continuously improving the product, he was also testing the market to see what customer preferences were in terms of pricing, colors, and styles.
Daymond was working at Red Lobster in the early days of FUBU, so he would spend early mornings visiting potential printers and embroiderers and make the T-shirts at night. He even closed FUBU three times because he ran out of cash. “I would be walking around the blocks when someone would say, Hey! Aren’t you that little kid that sells FUBU? I need some more; I’ve been looking for you! I had to keep opening the business back up because the business started to call me instead of me calling the business.” Fortunately, a friend of Daymond’s, J. Alexander, saw FUBU’s potential and invested, but he brought more to the table than money.
J. Alexander came up with a very interesting marketing plan. “The big black guys in the neighborhood had little options on what they could have to be very stylish. They had to go to Rochester Big & Tall and get a big white shirt or a black shirt or they had to pay a lot of money to get this stuff custom made for them because nobody was really making them. We just found a place that made 4X, 5X, 6X shirts and we made around 20 of these shirts. We made 20 of those shirts because we knew that these guys are normally bodyguards. Not all of them, but the ones we gave T-shirts were bouncers and something like that. They would not just wear it once—not like some of the stylish kids who don’t want to be seen wearing something twice. We knew that these guys would wear it forever.” These early adopters were walking billboards for FUBU!
Soon hip-hop artists who visited the clubs noticed FUBU on bouncers and bodyguards and demand started to increase. FUBU T-shirts were also being worn by video music director Ralph McDaniels’s bodyguards. Between 1985 and 1998, Ralph was well-known for bringing hip-hop music artists into the spotlight, and Daymond wanted a meeting with Ralph. Since his bodyguards were wearing FUBU, Ralph was familiar with the brand and agreed to the meeting. Daymond recollected, “We were scared to death but he was very sweet and told everybody that FUBU was the next best thing. I really owe Ralph so much as he was one of my mentors and he was also mentor to the community. He really put us out there and after that all the rappers, all of them, were ready to wear our stuff because Ralph gave us the thumbs-up!”
Daymond John brought in business partners to help get the work done. While the partners together had accumulated around $50,000 in credit card debt at the time, they decided to go to the 1995 MAGIC fashion trade show in Las Vegas. They couldn’t afford a booth at the time, but Daymond made the best use of his limited resources. He and his partners wore their FUBU-branded apparel and approached like-minded brands, such as Timberland. “I would stand outside their booth and say, ‘Hey! How are you doing? I got this new brand, FUBU’ and people would say, FUBU? the For Us By Us stuff? Where is your booth? I’ll walk over to your booth. I would say, Instead of walking into my booth, you want to hop into a cab and head to the Mirage Hotel. I have my booth in one of the rooms there and we worked it out. We wrote $300,000 in orders and that’s when I realized how much capital I actually needed.”
To fulfill the Las Vegas orders, Daymond approached banks for a loan but none would work with him. As a result, Daymond’s mother gave FUBU a $100,000 loan to cover operating expenses. Daymond set up manufacturing inside the house. He and his partners brought in sewing machines and hired seamstresses, all with the objective of completing the Las Vegas order by hand. Since he was paying all salaries on time, and paying for raw materials in advance, and having stores take credit for 30, 60, or 90 days, Daymond ran out of money within 4 months after having completed only $75,000 of the $300,000 orders promised.
The stores were starting to lose trust in Daymond, and Daymond was worried about losing his mother’s house. Daymond’s mother knew he needed a strategic investor and placed a classified advertisement in a local newspaper asking people to fund the company. Thirty of the 33 people who answered the ad were loan sharks charging extremely high interest rates, but one legitimate inquiry emerged. It was Norman Weisfeld, the president of Samsung’s textiles division. Samsung agreed to finance the operations of the brand but asked Daymond to commit to selling $5 million within the next 3 years. Daymond said yes and the deal with Samsung was done.
With Samsung’s backing, FUBU reached $30 million in revenue in 3 months, and the big retailers started to show renewed interest. Daymond recalled the resistance and discrimination of some buyers. “Many of the big retailers wanted to jump in on the highly profitable hip-hop bandwagon. Some of them were scared because they didn’t want ‘those’ type of people in the store or were afraid of shootouts or shoplifting. One large retailer also asked me to take off the picture of myself and my three partners because we apparently looked like a gang.” Undeterred, FUBU reached $350 million after 2 years and today has sales in the billions thanks to product line expansion, licensing, and partnering.
Today, Daymond John is semi-retired from FUBU and is now a Shark on Shark Tank. He’s invested more than $8M in Shark Tank entrepreneurs.
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