Challenges of Funding a New Business Venture, Essay Example

Introduction

The impact of the financial markets and related instability of the mortgage industry has had significant impact on the Southern California real estate market (Laker, 2009). Add massive population growth and uncontrolled congestion and pollution, and marketability will come into consideration when vying against competitors. From capital investment to capitalization on resources, building developers are in a pinch to meet the intense demand of stakeholders. Much like the start-up standard, the construction industry is virtually forced to reconfigure itself toward new market models of doing business. As Robert Kibble, managing partner of San Diego-based Mission Ventures points out, “people are a lot less forgiving today” when companies do not meet prescribed goals called milestones (Allen, 2008). While this is particularly true of start-ups, it also applies to older corporations in industries perceived to be volatile such as the housing industry, because the past several years have shown that even companies that were formerly able to rely upon the consistency of their own formula for high performance in benchmarking have faced some of their biggest struggles retaining and/or replacing investors whom have lost confidence. As traditional investment pockets shrink, developers will be looking for alternative market models, and in particular momentum measures drawn from trend analyses on new ‘start up’ opportunities for future capitalization and sustainability in the housing sector (Lee, 2010).

Background

One of the obvious consequences of the retracted economy is a reluctance to invest. Since 1957, KB has built more than a half a million homes since founded (Hoovers, 2010).  In order to raise capital and downsize operations since implosion of the mortgage industry, in a fairly radical measure to stem the drain on assets, the company sold its 49% stake in its French subsidiary Kaufman & Broad to PAI Partners for approximately $800 million in 2007 which led to closure of all international operations.  The upside to the sale is that the company was able to reduce its outstanding debt by about $1 billion (Hoovers, 2010). Continued financial risk mitigation will be a priority (Lee, 2010).

KB Home Corporation Comparison Data (www.hoovers.com)

Thesis

In order to attract finance to forthcoming projects, KB will find it incumbent to develop change business strategies that include streamlined operations, strict management of fiscal waste, and continued prioritization of the following factors: 1) implications of the financial markets, and especially the affect of the mortgage industry on the real estate market; 2) local and other competitors; 3) demographic changes in existing customer profile; 4) uniqueness of the product line; and 5) suppliers and their ability to bid under market on KB’s “reverse auction” site. The foregoing analysis looks at how KB Homes Corporation in Los Angeles might reposition the company to maintain customer loyalty and appeal to investors savvy to the complications in the regional real estate market.

Key Point

At present, the greater Los Angeles region is still struggling to recuperate from the global economic crisis of 2008 (Duchan, 2008). With over 12 million residents and rising, the labor market continues to ebb and flow at the highest unemployment rate within contemporary history. Despite the glamour of Hollywood, Los Angeles remains largely working class, with double the unemployment rate of equivalent metropolises in the South American hemisphere (i.e., Buenos Aires, with similar population size). As the demographic of the urban environment increases, and grows younger accordingly, KB Homes Corporation will be forced to market to a new demographic with distinct financial positions and lifestyle choices. Gentrification of formerly impoverished areas is also a trend, but Los Angeles is vast, and so are its poor and working class neighborhoods. The sensitivity of local contractors to these realities, as residents prefer to rehabilitate their cities, as well as reduce the carbon footprint under California regulatory law AB32, traditional developers such as KB Home Corp. must find new and creative ways to respond to the disappearance of the former development model.

Key Point

The aging and retirement of the existing customer base indicates that KB must invest in adequate market analysis of the population in order to retain those buyers (Kowitt and Lidner, 2010). Responsive retention of customers will also rely upon uniqueness of the product line, as baby boomers change lifestyles. KB may find that expansion of the small condominium units designed to ensure privacy may include different price points within the line, rather than price point according to size. The majority of the baby boomers were in their 40s in the 1990s, they are moving toward retirement at present. Logically speaking the market demand for substitutes for single family homes will most likely increase with this population, as adult children live on their own and the boomers look for ways in which to offset fixed income finances. However, since KB Homes Corp. is Los Angeles based, and the general demographic of Southern California is increasingly younger due to a massive influx of youth, whom are children of large immigrant households, the market niche of the boomers is not likely to do anything but retract as boomers look for cost of living offsets in less expensive areas, and in particular regions (or even extra-national locations) with healthier options outside of the congestion and pollution of the Greater Los Angeles region. KB Homes Corporation has indeed followed the path of the boomers, and their communities are now spread across the Sunbelt of the United States (Kauffman and Broad, 2010).

Key Point

From a global perspective, some companies have shown their fortitude by taking risks in brand identity and type of project; most with ‘green’ development in mind (Skanska, 2010). Sustainable building means sustainable growth, and this holds true in Los Angeles Headquartered, KB Home Corporation’s home markets as well. The increased interest in LEED certification of contractors, for example, has certainly accelerated some new growth in the area of environmental construction, and reinstated consumer and investor faith in the industry in a general sense. At present the company is a complete development corporation; offering finance, mortgage assistance, title, and insurance through its KB Home Mortgage in joint venture with Bank of America. Finally, suppliers and contractors continued ability bid within budget may be affected according to product line and location.

Conclusion

If KB Home Corp. has found that its construction results in brand loyalty amongst baby boomers, and their demographic has moved to surrounding regions, a market analysis of where they are relocating may have potential. Assessment outcomes most likely have revealed that “following the market” is the answer to continuance of return buyers. Traditional retirement communities in near proximity, such as the Palm Desert area, or Baja, Mexico offer an existing market of boomers who may be particularly interested in scaling down to the less expensive line of condominiums. In the context of the collapse of the sub-prime lending industry, where widespread foreclosures of mortgages has resulted in a spiraling and unpredictable real estate market, the traditional retirement communities may continue to offer sustainable growth opportunities where others may not. The challenges of such opportunities, which are most likely already pursued by KB Homes Corp. are the obvious: water and distribution of supplies to location. Nevertheless, the flexible labor market of the construction industry, and the especially low cost labor in Baja, Mexico would enable the corporation to control costs.

Works Cited

Allen, M. (2008 11 August 2008). Venture Funding Tightening Up, Especially for Startup Firms. San Diego Business Journal, Monday, August 11 2008. Retrieved from: http://www.allbusiness.com/banking-finance/financial-markets-investing/11583618-1.html

Duchan, R. et al. (2008). Costly external finance, corporate investment, and the subprime mortgage credit.  Journal of Financial Economics, Sep2010, 97 (3), 418-435. DOI: 10.1016/j.jfineco.2009.12.008

KB Home Corporation (2010). Hoovers. Retrieved from: www.hoovers.com

KB Home Corporation (2010). Kauffman and Broad. Retrieved from:  http://www.kaufmanandbroad.com/

Kowitt, B. and Lindner, M. (2010 14 June). 5 Great Places to Retire. Fortune, 161 (8), 14 June 2010, 132-133.

Laker, S. (2009). Recovery Position. Money Marketing, 29 October 2009, 38.

Lee, C.F et al. (2010). Handbook of Quantitative Finance and Risk Management. London, UK: Springer. Skanska (2010). Retrieved from: www.skanska.com