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Susan Harmeling Midterm...

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BAEP 450: Fundamentals of Entrepreneurship Professor Susan Harmeling Midterm 3rd March 2021 Neha Kamath

1. What risks and obstacles does Jill Draeger face? The main challenge that Jill faces is associated with the manufacturing aspect of her business. She has yet not finalized a manufacturer for her watches and is currently in talks with a potential manufacturer (Zhou), who would like a prepayment of $800,000 before even beginning production. He has placed hard restrictions on the minimum first order amount he would like from Jill, which is 40,000 units of watches, each made at a cost of $20. This was a challenge for Jill because she did not have an upfront payment of $800,000 because until now, she has been bootstrapping her venture with her own savings. The next challenge is that the POOC had only given her until December 30, 2016 to show that she had finalized on a manufacturer. A failure to do so would mean that her licensing agreement would not go through. Another major challenge Jill faces, is the fact that the Olympic Games have a long lead time. Hence, the fact that she still has not confirmed on a manufacturer would mean that her production process would get pushed, which would ultimately harm her brand reputation and her ability to successfully get a licensing agreement. Another challenge she faced was the fact that she is not well aware of the licensing market and working with the POOC. She relied heavily on her connections (such as Yang, her business school friend) and their working knowledge of the market, which would put her at risk as she would, to an extent, have to have high trust and blindly follow their guidance. The next major challenge she would face is with regards to her product sales. 80% of the sales would occur in the one month prior to, and during the Olympic games. Only 20%would occur during the 6-8 months prior to the Olympics. This involves high risk because it is extra important for Jill to ensure that her operations and productions are running smoothly during the duration of the Olympics.

Additionally, considering that post Olympics, her sales would be negligible, it was important to make sure that she wouldn’t have too many left-over inventory levels post the Games, because they would have no salvage value and would be worth nothing. Another challenge she faced was the fact that her business partner, Ban Joo-Sun (Joo) took on the role of selling to Olympic venues and merchandising shops. She did not necessarily need him to do this, however, she only followed through with it due to the logistical and distributional support that he would bring to the table. As a result, she ended up having to contribute more towards his pay. Her final challenge is one with regards to her equity stake in the business. Since Zhou has now agreed to paying for the first half of her order amount ($400,000 for 20,000 watches), Zhou in exchange would like an equity share in her business, and now it is down to Jill to decide whether she wants to dilute her ownership in her own company or not.

2. What deal terms should she offer to Zhou and/or Yang and why? In my opinion, I do not think Zhou should get an equity stake in Jill’s company, and should instead get a royalty deal with JYD. As the manufacturer, Zhou’s operations in JYD are constrained, defined and limited compared to others in the business. I believe royalty would be a good fit for Zhou because royalty is a form of guaranteed income. Even if JYD earns less income that expected, or is not profitable at all, Zhou’s royalty income would not change. On the other hand, if Zhou would be an equity holder in the company, decreased profits would mean that he would not get any dividends paid out to him from the company. As a manufacturer, this is dangerous for Jill because receiving less profit/dividends would be less of an incentive for Zhou to continue producing efficiently, since he would also have to bear a financial burden. Additionally, sticking to a royalty deal with Zhou means that as a manufacturer, his income is dependent on the number of sales JYD makes, which ultimately means how well they are able to produce the watches. As a result, it is an indirect motive for Zhou to stay efficient and active in his production process. All in all, Jill should consider that a royalty deal is

more predictable and safer for Zhou than equity, because revenues are inherently easier to predict than profits, and given that royalties provide more of a stable income flow, it is a less volatile option for him as the manufacturer. Moreover, considering that the equity in JYD is already split three ways, between Jill, Yang and Joo, adding in another equity holder would dilute their shares even more, which would be unfavourable for Yang and Joo too. Since they are the two who are contributing more in terms of their outreach and the number of tasks they are participating in for the company, a dilution in shares is the last thing they would need to disincentivise them for their hard work and effort that they are contributing into JYD. I would choose to give Yang an equity stake because of his vast networks in Korea- he has already helped Jill navigate herself through a foreign market by not only introducing her to new connections, but also building and maintaining them well for her. Additionally, by giving him a royalty deal, Jill would have the capabilities of selling her watches elsewhere in other stores In Korea, which would undoubtedly be beneficial for her sales. Moreover, considering that he would be paying for 20,000 units amounting to $400,000 worth of inventory before even confirming the manufacturing deal with Zhou, he believes in Jill’s business and is passionate to pursue it with her. However, it is important for Jill to be cautious of giving away too much equity at such an early stage of her business. As a result, I would provide the option of giving Yang a vesting equity over a certain period of time. This would guarantee that Yang will stay with the company for a minimum number of years and considering that the Olympic merchandising business is short lived, as mentioned in the case study, this would ensure that Jill won’t have to risk the chance of Yang leaving if things don’t go in their favour in the upcoming months. I would have Yang take a portion of equity over a period of time instead of a lumpsum at the beginning.

3. What other cases that we have looked at so far does this case remind you of, and why?

In many ways, this case is similar to the R&R case that we read about in class. First and foremost, this case involved the toy industry, that is also characterized similarly to what Jill is trying to produce- products sold in the toy industry generally had very short life cycles, frequently of no more than 2 years. Similarly, product sales of Jill’s Olympic watches would practically be negligible after the Olympics would be over. Hence, this is a big consideration that both parties have to make in terms of projecting their revenue sales, and even when deciding upon a manufacturer who would be reliable enough to stay with them for the long run, despite inconsistent sales after a certain period of time. Another big similarity between the R&R case and this case is that both exhibit the first definition of entrepreneurial behaviour. We learned this in class, as the pursuit of opportunity without regard to resources that we currently have under out control. As we can see from the R&R case, Bob did not have many resources under his claim before starting his company. In fact, most of his resources came from external sources, more specifically with the help of his network circle. Similarly, Jill is not a resident of Korea, nor did she know anyone in the industry before deciding to start the company. With the help of her connections like Yang, who further introduced her to other major contributors to her company, she slowly built her way to building a company. This shows that it is completely acceptable, and in fact, very common for entrepreneurs to not be a 100% prepared before starting a venture. It is normal to build and gain resources over time once they start their business. Lastly, Bob’s knowledge of the toy industry and his ability to gather necessary resources quickly made all the difference to the performance of his company. Similarly, having conducted vast research on the Olympic Games not just in Korea, but also through analysing past games, Jill has set herself up for success because she is well aware of the characteristics of the industry and is not short sighted of its challenges.

Another case that we have thoroughly studied in class that this case resembles, is the ChekAbuse case. This case primarily highlighted the challenges with equity ownership and more specifically, how to tackle the division of equity in a company when there are many players involved. In the ChekAbuse case, Sam, Pat and Alex were not clear about their equity split from the start, and this gave birth to a lot of problems in the future, when more people got involved in the company. Ultimately, transparent, strong and consistent communication is key between the founders to ensure that there is no flounders in the operations of a company, especially when it comes to something as grave as equity matters. It is important for Jill to decide how she wants her manufacturer, Zhou, to be involved in her company because he is a major contributor to its success, and both parties need to be on the same page to ensure a positive performance of the company. Additionally, with the added aspect of Yang wanting to gain an equity stake in the business, Jill must figure out how she wants to configure the equity positions in her business, so that each partner is not only satisfied, but also incentivized to perform well in their respective positions....