Chap006

Entrepreneurship and Starting a Small Business

Chapter 06

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

1. Explain why people take the risks of entrepreneurship; list the attributes of successful entrepreneurs; and describe entrepreneurial teams, intrapreneurs, and home- and web-based businesses.

2. Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.

LEARNING GOALSChapter Six

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3. Summarize the ways to learn about how small businesses operate.

4. Analyze what it takes to start and run a small business.

5. Outline the advantages and disadvantages small businesses have in entering global markets.

LEARNING GOALSChapter Six

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• Founded Roc-A-Fella Records before entering into a joint venture with Def Jam.

• Maintains control over the Jay-Z brand - including his clothing line and nightclub chain.

• Regarded as a business leader, he has met with Bill Gates, Warren Buffett and former President Bill Clinton.

Profile JAY-ZRoc Nation

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When this company’s founder had financial problems in the business's early days, he asked his suppliers to help him out. They did and they were well rewarded for their risk. Today these suppliers still service this mammoth company that has franchises all over the world.

Name that company!

NAME that COMPANYChapter Six

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The Age of the Entrepreneur

• Entrepreneurship -- Accepting the risk of starting and running a business.

WHAT is ENTREPRENEURSHIP?

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The Job-Creating Power of Entrepreneurship in the U.S.

• French immigrant Élruthère Irènèe du Pont de Nemours started Du Pont in 1802.

• David McConnell borrowed $500 from a friend to start Avon.

• George Eastman started Kodak with a $3,000 investment in 1880.

• Jeff Bezos started Amazon.com with investments from his family and friends.

NOTABLE ENTREPRENEURS

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• Derek Johnson – Launched mass-texting business, Tatango, as an undergrad.

• Peter Findley – Started Giant Campus, summer camps for middle- and high school age kids on college campuses.

• Sam Hogg – Started GiftZip.com, an electronic gift card aggregator site.

• John Goscha – Created IdeaPaint after many nights of brainstorming led to enormous sheets of paper plastered all over his dorm walls.

SUCCESS KNOWS NO AGE(Spotlight on Small Business)

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Source: Entrepreneurship, April 2010.

YOU’RE NEVER TOO YOUNG to be an ENTREPRENEUR

Five reasons to start your business right away:

1. You don’t have a mortgage or kids to take care of.

2. You can survive on little funds and work long hours.

3. No disruption to your career path. It hasn’t started yet!

4. Use of your alma mater for resources.

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Source: U.S. News and World Report, October 2010.

YOU’RE NEVER TOO OLD to be an ENTREPRENEUR EITHER!

• The highest rate of entrepreneurship activity is in the 55-64 age group!

• Since 1996, older Americans have opened businesses at a higher rate than 20-34 year olds.

• Older entrepreneurs have greater experience and more financial resources.

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Why People Take the Entrepreneurial Challenge

• Opportunity

• Profit

• Independence

• Challenge

WHY TAKE the RISK?LG1

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• Self-directed

• Self-nurturing

• Action-oriented

• Highly energetic

• Tolerant of uncertainty

WHAT DOES IT TAKE to be an ENTREPRENEUR?LG1


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Source: Entrepreneur, May 2010.

FIVE STEPS to STARTING YOUR BUSINESS in SCHOOL

1. Find a problem or need.

2. Zero in on specifics.

3. Do research on campus, test products with students.

4. Move forward with your ideas. Don’t wait!

5. Sacrifice.


LG1

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Turning Your Passion and Problems into Opportunities

• It fills customers’ needs.

• You have the skills and resources to start a business.

• You can sell the product or service at a reasonable price and still profit.

• You can get your product or service to customers before the window of opportunity closes.

• You can keep the business going.

An IDEA is a GOOD OPPORTUNITY IF…LG1

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Entrepreneurial Teams

• Entrepreneurial team -- A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product.

• An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apple’s success.

ENTREPRENEURIAL TEAMSLG1

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Micropreneursand Home-Based Businesses

• Micropreneurs -- Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle.

• About half of U.S. micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc.

• Nearly 60% of home-based micropreneurs are men.

MICROPRENEURSLG1

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• Computer technology has leveled the playing field.

• Corporate downsizing has led many to venture on their own.

HOME-BASED BUSINESS GROWTHLG1


• Social attitudes have changed.

• New tax laws have loosened restrictions on deducting expenses for home offices.

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• Getting new customers is difficult.

• Managing your time requires self-discipline.

• Work and family tasks are sometimes not separated.

• Government ordinances may restrict your business.

• Homeowner’s insurance may not cover business-related claims.

HOME-BASED BUSINESS ISN’T EASYLG1


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• Ability to start your business immediately

• Minimal start-up capital needed• No rent or excessive set-up

charges• Comfortable working conditions• Reduced wardrobe expenses• No commuting• Tax benefits• Elimination of office politics• Low risk for trial and error

BENEFITS of HOME-BASED BUSINESSESLG1


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• Difficult to establish work habits

• Limited support system

• Isolation

• Work space may be limited

• Clients may be uncomfortable coming to your home

• Zoning restrictions

• Success is based 100% on your efforts

DOWNSIDES of HOME-BASED BUSINESSESLG1


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Source: Entrepreneur, June 2010.

THINK YOU’RE READY to WORK from HOME?LG1


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Web-Based Businesses ONLINE BUSINESS

• Online sales reached $172.9 billion in 2010, 7% of all retail sales.

• All retail sales were up 2.5% in 2010. However, online retail sales grew 11%.

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Web-Based Businesses

• Affiliate Marketing -- An Internet-based marketing strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website.

AFFILIATE MARKETINGLG1

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Source: Entrepreneur, May 2010.

• Establish an identity.

• Be easy to find.

• Steal good ideas and make them your own.

• Look out for opportunities.

• Remember other forms of marketing.

• Be friendly!

BOOSTING YOUR BUSINESS’SONLINE PRESENCELG1

Web-Based Businesses

Photo Courtesy of: Marc Wathieu

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Entrepreneurship Within Firms

• Intrapreneur -- A creative person who works as an entrepreneur within a corporation.

• Intrapreneurs use a company’s existing resources to launch new products for the company.

• Art Fry of 3M developed Post-Its when he was trying to mark pages of his hymnal without damage.

INTRAPRENEURSLG1

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Encouraging Entrepreneurship: What Government Can Do

• Immigration Act passed in 1990 created a category of “investor visas” that encourage entrepreneurs to come to the U.S.

• Enterprise Zones -- Specific geographic areas to which governments attract private business investment by offering lower taxes and other government support.

• Incubators -- Offer new businesses low-cost offices with basic services.

GOVERNMENT and ENTREPRENEURSHIPLG1

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Progress Assessment

• Why are people willing to take the risks of entrepreneurship?

• What are the advantages of entrepreneurial teams?

• How do micropreneurs differ from other entrepreneurs?

• What are some opportunities and risks of web-based businesses?

PROGRESS ASSESSMENT

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Small Versus Big Business

• Small Business -- Independently owned and operated, not dominant in its field of operation and meets certain standards of size.

• Businesses are “small” in relation to other businesses in their industries.

SMALL BUSINESSESLG2

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Small Versus Big Business

• There are 27.8 million small businesses in the U.S.

• Of all nonfarm businesses in the U.S., almost 97% are considered small.

• Small businesses account for over 50% of the GDP.

• Small businesses generate 60-80% of new jobs.

• About 80% of U.S. workers’ first jobs were in small business.

SMALL BUSINESS STATISTICSLG2

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Importance of Small Business

• More personal customer service.

• The ability to respond quickly to opportunities.

ADVANTAGES of SMALL OVER BIG BUSINESSLG2

Photo Courtesy of: Elliot Brown

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Small Business Success & Failure

• Owner closing a business to start another is reported as a “failure.”

• Changing forms of ownership is reported as a “failure.”

• Retirement is reported as a “failure.”

BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE…LG2

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Source: World Features Syndicate.

• Tommy Hilfiger – First store went bankrupt

• Milton Hershey – First confectionery failed

• H.J. Heinz – Company went bankrupt six years after start

THEY DID WHAT?Famous Business Failures

• Walt Disney – First film company went bankrupt

• Henry Ford – First two car companies failed

• L.L. Bean – Almost went bankrupt in first year

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Small Business Success & Failure

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Learning About Small Business Operations

• Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs.

• Get Some Experience – Gain three years experience in the field; then start a part-time small business.

• Take Over a Successful Firm – Serve as an apprentice and eventually take over once the owner steps down.

LEARNING ABOUT SMALL BUSINESSLG3

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Suppose you worked in a company for two years and you see signs of it faltering. You and a coworker have ideas about how to succeed and are considering quitting to start your own company.

• Should you approach other coworkers about working for your new venture?

• Will you try to lure your old boss’s customers?

• What are the alternatives?

• What are the consequences?

• What is the most ethical choice?

GOING DOWN with the SHIP(Making Ethical Decisions)

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Managing a Small Business

• Planning

• Financing

• Knowing customers

• Managing employees

• Keeping records

MAJOR BUSINESS FUNCTIONSLG4

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Begin with Planning

• Business Plan -- A detailed written statement that describes the nature of the business, the target market, the advantages the business will have over competition, and the resources and owners’ qualifications.

• A business plan forces potential owners to be specific about what they will offer.

• A business plan is mandatory for talking with bankers or investors.

BUSINESS PLANSLG4

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Writing a Business Plan

• A good plan takes a long time to prepare.

• A good executive summary catches interest and tempts potential investors to read on.

WRITING a BUSINESS PLAN

• Getting the plan into the right hands is almost as important as getting the right information in it.

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Source: Bloomberg Businessweek, www.businessweek.com, accessed June 2011.

• Clarify Expectations – What will each person contribute?

• Discuss Work/Family Boundaries – What is the line that separates work from personal relationships?

• Develop Good Communication – Agree about types of decisions you’ll make jointly and on your own.

• Clarify Long-Term Intentions – Discuss how long everyone will work full time and goals for the business.

• Have an Escape Hatch – Have a Plan B.

A FAMILY AFFAIRWhat to Consider Before Starting a Family BusinessLG4

Writing a Business Plan

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Getting Money to Fund a Small Business

• Personal savings

• Relatives

• Former employers

• Banks & finance companies

• Government agencies

• Angel investors

• Venture capitalists -- Individuals or companies that invest in new businesses in exchange for partial ownership.

SOURCES of CAPITALLG4

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Source: Inc., October 2010.

Getting Money to Fund a Small Business FUNDING YOUR DREAM

Getting Cash When Financing Isn’t an OptionLG4

1. Get close to your customers.

2. Make clients pay upfront.

3. Outsource tasks on the cheap.

4. Get in front of customers quickly.

5. Become an expert.

6. Ask for help.

7. Be patient.

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Getting Money to Fund a Small Business

• CDFIs are playing a big role in the economic recovery.

• First formed in the early 1980s; by 2009, over $1 billion flowed into CDFIs from investment companies.

• Only 1% of loans were not paid back in the last 30 years!

COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONSLG4

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• Kickstarter and Lending Club connect loan seekers to potential lenders.

• Administrators assign interest rates between 6.78% and 24.95% based on their credit history, how much money is needed, and what the person is using it for.

SOCIAL LENDING(Social Media in Business)

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• Small Business Administration (SBA) -- A U.S. government agency that advises and assists small businesses by providing management training and financial advice.

• SBA started a microloan program in 1991 that provides very small loans to small business owners.

• Program judges worthiness based on the borrowers’ integrity and soundness of their business ideas.

The SMALL BUSINESS ADMINISTRATIONLG4

The Small Business Administration

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• Small Business Investment Company (SBIC) -- A program through which private investment companies licensed by the SBA lend money to small businesses.

• A SBIC must have a minimum of $5 million in capital and can borrow up to $2 from the SBA for each $1 of capital it has.

• SBICs are able to identify a business’s trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.

The SMALL BUSINESS INVESTMENT COMPANYLG4

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• Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states.

• SBDCs are able to evaluate the feasibility of your idea, develop your business plan and complete your funding application – for no charge.

SMALL BUSINESS DEVELOPMENT CENTERSLG4


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• Announced by the SBA in February 2011, this program’s aim was to provide a simpler and easier way for lenders to make smaller loans in underserved areas.

• In March 2011, the House Small Business Committee recommended the SBA budget be cut and the program couldn’t be funded.

COMMUNITY ADVANTAGE and SMALL LOAN ADVANTAGE PROGRAM

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Source: Inc., October 2010.

HELP PLEASE!More SBA Resources and Other Helpful Groups

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• Small Business Investment Companies

• The Office of Innovation & Entrepreneurship

• SCORE

• Entrepreneurship.org


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Knowing Your Customers

• Market -- Consumers with unsatisfied wants and needs who have both resources and willingness to buy.

• Set out to fill the market’s needs by offering top quality and great service at a fair price.

• One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.

The MARKETLG4

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Managing Employees

• Hiring, training and motivating employees is critical.

• Employees of small companies are often more satisfied with their jobs – they feel challenged and respected.

• Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.

MANAGING EMPLOYEESLG4

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Keeping Records

• Computers simplify the process by helping with inventory control, customer records and payroll.

• A good accountant can help in:- Deciding whether to buy or lease equipment. - Deciding whether to own or rent a building.- Tax planning.- Financial forecasting.- Choosing sources of financing.- Writing requests for funds.

ACCOUNTING ASSISTANCELG4

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Looking for Help

• Owners need outside consulting advice early in the process.

• Small and medium-sized firms cannot afford to hire experts as employees.

• A competent lawyer can help with:- Leases- Contracts- Partnership agreements- Protection against liabilities

LEGAL HELPLG4

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• Marketing decisions need to be made long before introducing a product or opening a store.

• A marketing research study can help you:- Determine where to locate.- Whom to select as your target market.- What is an effective strategy for reaching the

market.

MARKETING RESEARCHLG4

Looking for Help

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OTHER FORMS OF HELPLG4

Looking for Help

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Progress Assessment

A business plan is probably the most important document a small business owner will ever create. There are nine sections in the business plan outline on pp. 165-166.

• Can you describe at least five sections of a business plan?

PROGRESS ASSESSMENT

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Going International: Small Business Prospects

• Small- and medium-sized businesses accounted for 99% of recent export growth.

• Advantages of global trade for small businesses:- Overseas buyers enjoy dealing with individuals.- Small companies can usually begin shipping

much faster.- They provide a wide variety of suppliers.- They can give more personal service and

attention.

SMALL BUSINESS PROSPECTS ABROADLG5

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• In emerging markets, entire industries and services are wide open for innovation.

• Many entrepreneurs in the developing world hold degrees and have worked at high-level companies.

• Entrepreneurs must often expand into different areas of business in order for their venture to grow.

EMERGING MARKETS, EMERGING ENTREPRENEURSHIP

(Reaching Beyond Our Borders)

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Progress Assessment

• Why do many small businesses avoid doing business globally?

• What are some of the advantages small businesses have over large businesses in selling in global markets?

PROGRESS ASSESSMENT

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