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Chapter7: Entrepreneurship

Entrepreneurship

Table 7.2 lists some extraordinary entrepreneurs. The companies they founded are famously successful—and all of the founders started in their 20s. Two young entrepreneurs who started a highly successful business are Tony Hsieh and Nick Swinmurn. In 1999, Swinmurn had the then-new idea to sell shoes online, but he needed money to get started. Hsieh, who at age 24 had already just sold his first start-up (LinkExchange, sold to Microsoft for $265 million), agreed to take a chance on the new venture. Swinmurn has moved on, but Hsieh remains at the helm of the company as the CEO of Zappos.com. In a recent year, Zappos.com enjoyed sales of $1 billion.16 <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

   The real, more complete story of entrepreneurship is not about the famous people in Table 7.2—its mostly about people you've probably never heard of. They have built companies, thrived personally, created jobs, and made positive contributions to their communities through their businesses. Or they're just starting out.

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Tony Hsieh is listed as an extaordinary entrepreneur. At the age of 24, he had already sold off his first venture and took on Zappos.com, where he continues to work today.

 Why Become an Entrepreneur?
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Bill Gross has started dozens of companies. When he was a boy, he devised homemade electronic games and sold candy for a profit to friends. In college, he built and sold plans for a solar heating device, started a stereo equipment company, and sold a software product to Lotus. In 1996, he started Idealab, which hatched dozens of start-ups on the Internet. Recently launched Idealab companies include one that is making a three-dimensional (3-D) printer, and another that sells robotics technology to supermarkets and toy companies. Through its Energy Innovations subsidiary, Idealab also has branched out into the now-hot market for alternative-energy technology.17

   Why do Bill Gross and other entrepreneurs do what they do? Entrepreneurs start their own firms because of the challenge, the profit potential, and the enormous satisfaction they hope lies ahead. People starting their own businesses are seeking a better quality of life than they might have at big companies. They seek independence and a feeling of being part of the action. They feel tremendous satisfaction in building something from nothing, seeing it succeed, and watching the market embrace their ideas and products.

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TABLE 7.2
Mega-Entrepreneurs Who Started in Their 20s

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SOURCES: J. A. Timmons, New Venture Creation, 6th ed. (New York: McGraw-Hill/Irwin, 2004), p. 7. © 2004 The McGraw-Hill Companies.

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   People also start their own companies when they see their progress or ideas blocked at big corporations. When people are laid off, they often try to start businesses of their own. And when employed people believe they will not receive a promotion or are frustrated by bureaucracy or other features of corporate life, they may quit and become entrepreneurs. Years ago, Philip Catron became disillusioned with his job as a manager at ChemLawn because he concluded that the lawn care company's reliance on pesticides contributed to illness in its employees, its customers' pets, and even in the lawns themselves. Catron left the company to start NaturaLawn of America, based on the practice of integrated pest management, which uses natural and nontoxic products as much as possible, reducing pesticide use on lawns by 85 percent. Over two decades, Catron built NaturaLawn into 72 franchises in 25 states—and helped integrated pest management become mainstream, as even his former employer, now part of TruGreen ChemLawn, has changed many of its practices.18

   Immigrants also may find conventional paths to economic success closed to them and turn to entrepreneurship.19 For example, the Cuban community in Miami has produced many successful entrepreneurs, as has the Vietnamese community throughout the United States. Sometimes the immigrant's experience gives him or her useful knowledge about foreign suppliers or markets that present an attractive business opportunity. Rakesh Kamdar immigrated to the United States from India to study computer science, but while here, he saw a way he could meet the huge U.S. demand for nursing talent. He set up DB Healthcare to recruit nurses from India to work in the United States. Unlike U.S. competitors that had failed, Kamdar set up meetings at DB's Indian offices, and he invited nurses to attend with their husbands, parents, and in-laws. His staff discussed family and individual questions related to the American jobs. With this strategy, DB Healthcare was earning millions of dollars within a few years.20

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FIGURE 7.1
Who Is the Entrepreneur?

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SOURCE: J. A. Timmons, New Venture Creation, 6th ed. (New York: McGraw-Hill/Irwin, 2004), p. 67–68 exhibit 20.13. © 2004 The McGraw-Hill Companies.

What Does It Take to Succeed?

What can we learn from the people who start their own companies and succeed? What talents enable entrepreneurs to succeed? We express these characteristics in general terms with Figure 7.1. Successful entrepreneurs are innovators and also have good knowledge and skills in management, business, and networking.21 In contrast, inventors may be highly creative but often lack the skills to turn their ideas into a successful business. Manager-administrators may be great at ensuring efficient operations but aren't necessarily innovators. Promoters have a different set of marketing and selling skills—useful for entrepreneurs, but those skills can be hired, whereas innovativeness and business management skills remain the essential combination for successful entrepreneurs.

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Best Entrepreneurs 25 and Under

   

SmallBiz's top young entrepreneur went from selling shirts out of his car to opening his own stores. Who are the country's most promising young entrepreneurs? With help from our readers, we set out to answer that question in our fourth annual Best Entrepreneurs 25 and Under Special Report. As in previous years, we posted a nomination form on the SmallBiz channel of BusinessWeek's Web site and asked readers to recommend business whizzes who were no more than 25 years old and ran their own companies. We received a record number of nominations, ranging from the founder of an online TV network aimed at college students to a maker of flavored plastics.

   After the call for nominations ended in July, our staff sifted through the entries, choosing the 25 most impressive. In this we had some high-profile help, from Virgin's Sir Richard Branson, BusinessWeek contributor and Duke University executive-in-residence Vivek Wadhwa, and Bo Fishback, vice-president of entrepreneurship at the Kauffman Foundation. As in prior years, some of the finalists were backed by angel investors and venture capitalists, some were already profitable, and most made heavy use of the Internet. The biggest difference? More entrepreneurs voiced a desire not only to make a profit but also to make the world a better place, with a large number focused on education. We posted profiles of the 25 finalists online, asked readers to vote for the most outstanding, and received a record number of votes.

   Now (drumroll, please!) the results are in. Music school dropout Johnny Earle, who has since turned 26, led the pack with more than 4,700 votes for Johnny Cupcakes, a line of limited-edition T-shirts.

   http://www.businessweek.com/magazine/content/08_70/s0810022684046.htm

SOURCE: Nick Leiber, Stacy Perman, and John Tozzi, “Best Entrepreneurs 25 and Under,” BusinessWeek, October 17, 2008.

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What Business Should You Start?

You need a good idea, and you need to find or create the right opportunity. The following discussion offers some general considerations for choosing a type of business. For guidance in matching your unique strengths and interests to a business type, another helpful resource is What Business Should I Start? Seven Steps to Discovering the Ideal Business for You, by Rhonda Abrams. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo2.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

The Idea   Many entrepreneurs and observers say that in contemplating your business, you must start with a great idea. A great product, a viable market, and good timing are essential ingredients in any recipe for success.

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Some of the most exciting ideas today involve products that meet a very basic need at a very low cost. Socially responsible entrepreneurs are combining technological skills with concern for people who live without access to clean water and reliable electricity, creating high-tech projects that can improve lives in poor communities. For example, Nedjip Tozun and Sam Goldman founded D.light Design to develop and sell solar-powered lights, made with low-priced solar panels, efficient LEDs, and sophisticated power management software.

   Tozun and Goldman see their market in developing countries, where many people rely on kerosene and diesel lamps, which not only provide a poor quality of lighting but also pollute the air and present a serious danger from fires and serious burns. Although the $25 price tag for a D.light lamp is high for many communities where people earn less than a dollar a day, when family members pool their resources, they find that the lamp allows them to work longer hours, save money spent on fuel, and skip long trips to buy it, so the purchase is a good investment in a cleaner, safer life.

   D.light Design is a business, not a charity. Tozun and Goldman see their buyers as “great customers” who see a “clear value proposition” in their product. They also see potential to expand into other solar-powered products, building their business as they meet basic needs.22

   Many great organizations have been built on a different kind of idea: the founder's desire to build a great organization, rather than to offer a particular product.23 Examples abound. Bill Hewlett and David Packard decided to start a company and then figured out what to make. J. Willard Marriott knew he wanted to be in business for himself but didn't have a product in mind until he opened an A&W root beer stand. Masaru Ibuka had no specific product idea when he founded Sony in 1945. Sony's first product attempt, a rice cooker, didn't work, and its first product (a tape recorder) didn't sell. The company stayed alive by making and selling crude heating pads.

You don't have to be first with a product idea if you can figure out a way to execute an existing idea better than the competition. Federal Express succeeded by borrowing DHL's method of using jets to race ahead of UPS in overnight delivery service in the United States. IBM combined existing components and Microsoft's operating system to launch a personal computer that eventually beat Apple's and Atari's earlier models. And Best Buy raised funds in the stock market to expand a line of stores aimed at competing with Circuit City, which is now out of business.24

 

   Many now-great companies had early failures. But the founders persisted; they believed in themselves and in their dreams of building great organizations. Be prepared to kill or revise an idea, but never give up on your company—this has been a prescription for success for many great entrepreneurs and business leaders. Think about Sony, Disney, Hewlett-Packard, Procter & Gamble, IBM, and Wal-Mart: their founders' greatest achievements—their greatest ideas—are their organizations.25

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The Opportunity   Entrepreneurs spot, create, and exploit opportunities in a variety of ways.26 Entrepreneurial companies can explore domains that big companies avoid and introduce goods or services that capture the market because they are simpler, cheaper, more accessible, or more convenient. While Shayne McQuade was touring Spain, taking a break from his career as a management consultant, he noticed that he had a problem figuring out how to recharge his cell phone. After his trip, McQuade developed a way to make backpacks and messenger bags containing solar panels. His company, Voltaic Systems, contracts to have the bags manufactured in China from material made out of recycled plastic. The products are sold in sporting goods stores, and McQuade is trying to get them stocked by Sam's Club. Eventually he hopes to offer briefcases with the solar power to recharge a laptop.27

   To spot opportunities, think carefully about events and trends as they unfold. Consider, for example, the following possibilities:28

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Harren Jhoti, Chief Executive and founder of a drug discovery and development company called Astex Therapeutics, receives the Chemistry World Entrepreneur of the Year Award at the annual Royal Society of Chemistry Innovations Awards in London. Mr. Jhoti built Astex over eight years, raising over £63 million. The annual award is presented to an individual who has established or contributed to the growth of a small or medium sized chemistry-related company.

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Technological discoveries. Start-ups in biotechnology, microcomputers, and nanotechnology followed technological advances. Howard Berke, who has two Nobel prize winners on his payroll, established Konarka Technologies to offer products based on advances in solar cells. In contrast to the older technology of solar panels, solar cells are based on organic chemicals, so they are more flexible and can be installed in a variety of projects (see the previous example of Voltaic Systems).29

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Demographic changes. All kinds of health care organizations have sprung up to serve an aging population, from Fit After Fifty exercise studios to assisted-living facilities. One business that targets both the aging American population and the growth in single-parent and dual-career households is Errands Done Right, located in Harrisburg, Pennsylvania. The service, launched by Donna Barber and Dawn Carter, is designed to assist those who are pressed for time or have difficulty getting around.30

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Lifestyle and taste changes. Start-ups have capitalized on new clothing and music trends, desire for fast food, and growing interest in sports. In recent years, more consumers want to help take care of the environment, and more businesses are concerned about showing consumers that they care, too.

 

Economic dislocations, such as booms or failures. In recent years, rising oil prices have spurred a variety of developments related to alternative energy or energy efficiency. Howard Berke, the entrepreneur behind Konarka Technologies' solar cells, says, “I don't come at this as an environmentalist. I come at this from good business sense. The cost of renewables … is more competitive when compared with fossil fuel.”31

 

Calamities such as wars and natural disasters. The terrorist attacks of September 2001 spurred concern about security, and entrepreneurs today are still pursuing ideas to help government agencies prevent future attacks. The more recent hurricanes on the Gulf Coast raised awareness of the importance of preparing for emergencies.

 

Government initiatives and rule changes. Deregulation spawned new airlines and trucking companies. Whenever the government tightens energy-efficiency requirements, opportunities become available for entrepreneurs developing ideas for cutting energy use.

Franchises   One important type of opportunity is the franchise. You may know intuitively what franchising is. Or, at least you can name some prominent franchises: McDonald's, Jiffy Lube, the Body Shop, Dunkin' Donuts, add your favorites here. Franchising An entrepreneurial alliance between a franchisor (an innovator who has created at least one successful store and wants to grow) and a franchisee (a partner who manages a new store of the same type in a new location). is an entrepreneurial alliance between two organizations, the franchisor and the franchisee.32 The franchisor is the innovator who has created at least one successful store and seeks partners to operate the same concept in other local markets. For the franchisee, the opportunity is wealth creation via a proven (but not failureproof) business concept, with the added advantage of the franchisor's expertise. For the franchisor, the opportunity is wealth creation through growth. The partnership is manifest in a trademark or brand, and together the partners' mission is to maintain and build the brand. The Noodles & Company chain of fast-casual restaurants first grew by opening 79 company-owned locations. Management concluded that it could grow at a faster pace through franchising. Establishing standard menus and prices took a year, but franchising has helped the company almost double its revenues in just two years.33

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In a recent three-year period, almost 900 new franchise concepts were launched in the United States. The categories with the most new concepts were food retailing, service businesses, and sports and recreation. The categories that added the most new franchise units were service businesses, building and construction, and child-related services.34

 

   People often assume that buying a franchise is less risky than starting a business from scratch, but the evidence is mixed. One study that followed businesses for six years found the opposite of the popular assumption: 65 percent of the franchises studied were operating at the end of the period, while 72 percent of independent businesses were still operating. One reason may be that the franchises involved mostly a few, possibly riskier, industries. A study that compared only restaurants over a three-year period found that 43 percent of the franchises and 39 percent of independent restaurants remained in business.35

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A flight into space might become as easy as booking a flight to Florida thanks to Burt Rutan. His idea to launch people into space may have opened the door for an entire space tourism industry.

   If you are contemplating a franchise, consider its market presence (local, regional, or national), market share and profit margins, national programs for marketing and purchasing, the nature of the business, including required training and degree of field support, terms of the license agreement (e.g., 20 years with automatic renewal versus less than 10 years or no renewal), capital required, and franchise fees and royalties.36

   Although some people think success with a franchise is a no-brainer, would-be franchisees have a lot to consider. Luckily, plenty of useful sources exist for learning more, including the International Franchise Association (http://www.franchise.org), the Small Business Administration (http://www.sba.gov), Franchise Chat (http://www.franchise-chat.com), and the Business Franchise Directory (http://www.business-franchisedirectory.com). In addition, the Federal Trade Commission investigates complaints of deceptive claims by franchisors and publishes information about those cases. Dale Cantone, who heads the Franchise and Business Opportunities unit for Maryland's attorney general, advises people to take their time in investigating business opportunities, consulting with an accountant or lawyer who has experience in franchising.37

The Next Frontiers   The next frontiers for entrepreneurship—where do they lie? Throughout history, aspiring entrepreneurs have asked this question. When a business magazine asked prominent investors in new businesses to name the best ideas for a new start-up, their responses included next-generation batteries with enough juice to power cars after a seconds-long charge, longer-lasting tiny batteries to keep cell phones and cameras running for more hours, implantable wireless devices that can monitor heartbeats or blood sugar levels, and online social networking sites that focus on allowing artists and musicians to share and promote their works.38

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   One fascinating opportunity for entrepreneurs is outer space. Historically, the space market was driven by the government and was dominated by big defense contractors such as Boeing and Lockheed Martin. But now, with demand for satellite launches and potential profits skyrocketing, smaller entrepreneurs are entering the field. Some of the most dramatic headlines involve space tourism. Zero Gravity already operates flights in converted Boeing 727 jets that simulate the experience of weightlessness by flying up and down like a roller-coaster 10,000 feet above the earth. Famous passengers who signed up for the $3,500 flights have included business owner Martha Stewart and physicist Stephen Hawking.39 Other recent ventures in space have included using satellites for automobile navigation, tracking trucking fleets, and monitoring flow rates and leaks in pipelines; testing designer drugs in the near-zero-gravity environment; and using remote sensing to monitor global warming, spot fish concentrations, and detect crop stress for precision farming.

   Homeland security is another newly burgeoning industry. A vast number of companies in a wide range of industries are attempting to benefit—for example, baggage screening, smallpox vaccines, capturing arrival and departure information on travelers, explosives detection systems, and sensors for airborne pathogens. Some of the growth is supported by government investment in security-related technology. For example, the state of Illinois recently gave grants to SSS Research, which develops database software that helps terrorism analysts, and RiverGlass, which develops software that connects databases to find patterns describing high-risk people. In Michigan, the state-funded Venture Michigan I Fund supports investment in Michigan-based start-ups in the security and other growth industries.40

The Internet   The Internet is a business frontier that continues to expand. With Internet commerce, as with any start-up, entrepreneurs need sound business models and practices. During the heady days of the Internet rush, many entrepreneurs and investors thought revenues and profits were unimportant and all that mattered was to attract visitors to their Web sites (“capture eyeballs”). But you need to watch costs carefully, and you want to break even and achieve profitability as soon as possible.41

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Customized products are just a click away. Zazzle.com produces customized T-shirts, posters, and postage stamps. It has built a library of over 500,000 digital images, including more than 3,500 items of copyrighted material licensed from Walt Disney's legendary characters such as Mickey Mouse and Goofy. Shown here is a sample of customized postage stamps provided by Zazzle.

   At least five successful business models have proven successful in the e-commerce market: transaction fee, advertising support, intermediary, affiliate, and subscription models.42 In the transaction fee model Charging fees for goods and services., companies charge a fee for goods or services. Amazon.com and online travel agents are prime examples. In the advertising support model Charging fees to advertise on a site., advertisers pay the site operator to gain access to the demographic group that visits the operator's site. More than one-third of online ads are for financial services, and another 22 percent are for Web media. More than half of the ads appear on e-mail pages.43

   The intermediary model Charging fees to bring buyers and sellers together. has eBay as the premier example, bringing buyers and sellers together and charging a commission for each sale. With the affiliate model Charging fees to direct site visitors to other companies' sites., sites pay commissions to other sites to drive business to their own sites. Zazzle.com, Spreadshirt.com, and CafePress.com are variations on this model. They sell custom-decorated gift items such as mugs and T-shirts. Designers are the affiliates; they choose basic, undecorated products (such as a plain shirt) and add their own designs, creating the customized products offered to consumers. Visitors to a designer's Web site can link to, say, Zazzle and place an order, or they can go directly to Zazzle to shop. Either way, Zazzle sets the basic price, and the designer gets about 10 percent. Spreadshirt and CafePress let designers choose how much above the base price they want to charge consumers for the decorated product.44 Finally, Web sites using the subscription model Charging fees for site visits. charge a monthly or annual fee for site visits or access to site content. Newspapers and magazines are good examples.

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   What about businesses whose primary focus is not e-commerce? Start-ups and established small companies can create attractive Web sites that add to their professionalism, give them access to more customers, and bring them closer to suppliers, investors, and service providers. Traditional companies can move much more quickly than in the past and save money on activities including customer service/support, technical support, data retrieval, public relations, investor relations, selling, requests for product literature, and purchasing. All this is possible even as the costs of computing continue to drop and as more free software tools are being disseminated. As a result, setting up shop online costs less than it ever did.

   Munjal Shah's company, Riya, has set up an online shopping service called Like.com, which uses visual recognition software to help shoppers find products that look similar to one another. The search software, Shah says, was based on open-source programs and cost about $50,000; five years ago, it would have been unaffordable. In addition, because current computer chips work more efficiently, the cost to run Riya's Web servers is about one-tenth of what he would have paid a few years ago.45

What Does It Take, Personally?

Many people assume that there is an “entrepreneurial personality.” No single personality type predicts entrepreneurial success, but you are more likely to succeed as an entrepreneur if you exhibit certain characteristics:46

  

1.

  

Commitment and determination: Successful entrepreneurs are decisive, tenacious, disciplined, willing to sacrifice, and able to immerse themselves in their enterprises.

  

2.

  

Leadership: They are self-starters, team builders, superior learners, and teachers. Communicating a vision for the future of the company—an essential component of leadership that you'll learn more about in Chapter 12—has a direct impact on venture growth.47

  

3.

  

Opportunity obsession: They have an intimate knowledge of customers' needs, are market driven, and are obsessed with value creation and enhancement.

  

4.

  

Tolerance of risk, ambiguity, and uncertainty: They are calculated risk takers and risk managers, tolerant of stress, and able to resolve problems.

  

5.

  

Creativity, self-reliance, and ability to adapt: They are open-minded, restless with the status quo, able to learn quickly, highly adaptable, creative, skilled at conceptualizing, and attentive to details.

  

6.

  

Motivation to excel: They have a clear results orientation, set high but realistic goals, have a strong drive to achieve, know their own weaknesses and strengths, and focus on what can be done rather than on the reasons things can't be done.

“Even if you think you know it all, there's a lot of life lessons you're going to learn in school. Develop your network while you're there with peers and professors.”

   Sam Uisprapassorn, cofounder, Crimson Skateboards48

 

   Bill Gross, whom you met in our earlier discussion of “Why Become an Entrepreneur,” exemplifies some of these characteristics. He persevered even after his brainchild, Idealab, seemed to have crashed and burned. The company was launched in the mid-1990s to nurture Internet start-ups as they were being formed left and right. Companies that Idealab invested in included eToys, Eve.com, and Pet-Smart.com. If you haven't heard of them, it's probably because they grew fast and then went out of business because sales couldn't keep up with the hype and the hopes. Today Gross explains that he hadn't intended for Idealab to help exclusively dot-com businesses, but that's what entrepreneurs were all starting in the 1990s. When the Internet boom crashed several years ago, Gross laid off employees and shuttered offices, but he didn't abandon his vision of helping entrepreneurs. Instead of giving up, Gross established stricter criteria for funding companies in the future—and determined that he would choose companies whose activities make a difference. Of the company's near failure, Gross says, “We have a lot more wisdom now,” admitting that he might have needed to learn wisdom the hard way.49

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   Compare these qualities and examples of successful entrepreneurs with the description of Richard Branson in the “Management Close-Up: Taking Action” feature. How well does Branson fit the mold of a typical entrepreneur?

Management Close-Up

TAKING ACTION

Apparently, winning big in business isn't enough excitement for entrepreneur Richard Branson. He is also a modern-day adventurer. He has set world records for crossing the Atlantic Ocean and the English Channel in boats. In 1987 he became the first person to cross the Atlantic in a hot-air balloon. He has attempted to circle the world nonstop in a balloon and most recently had to abandon an Atlantic crossing in a racing yacht when 40-foot waves shredded his mainsail. But he already has his next challenge in sight—he's attempting to bring outer space to vacationers.

   Branson's Virgin Galactic company wants to offer spaceflight for tourists. Galactic's first craft, the mother ship White Knight Two, was unveiled in 2008. It is designed to lift a rocket filled with eight passengers from earth to a launch point at 48,000 feet. Although the spacecraft itself is still under construction, the first passengers have already plunked down $200,000 for their ride; 200 others are on a waiting list.

   Although Branson dropped out of school at age 16, he prides himself on being a lifelong learner with an interest in creating goods and services that make the world a better place. He has a talent for looking at situations from a completely different perspective than most people.

   In addition, despite being a risk taker, Branson says it is important always to have a Plan B. Any business venture can have external risks, so a wise entrepreneur, he declares, takes steps to manage those risks.50

  

Many Virgin businesses have originated from Richard Branson's own wants and needs. Besides an ability to recognize a want or a need, what other skills did Branson need to become successful?

  

Richard Branson seems to thrive on challenge and risk taking. How has this helped him succeed in his various businesses? Could it hurt also? If so, how?

Making Good Choices   Success is a function not only of personal characteristics but also of making good choices about the business you start. Figure 7.2 presents a model for conceptualizing entrepreneurial ventures and making the best possible choices. It depicts ventures along two dimensions: innovation and risk. The new venture may involve high or low levels of innovation, or the creation of something new and different. It can also be characterized by low or high risk. Risk refers primarily to the probability of major financial loss. But it also is more than that; it is psychological risk as perceived by the entrepreneur, including risk to reputation and ego.51

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FIGURE 7.2
Entrepreneurial Strategy Matrix

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SOURCE: Reprinted from Business Horizons, May–June 1997, Sonfield and Lussier, “Entrepreneurial Strategy Matrix: A Model of New and Ongoing Ventures,” Copyright © 1997, with permission from Elsevier.

   The upper-left quadrant, high innovation/low risk, depicts ventures of truly novel ideas with little risk. As examples, the inventors of Lego building blocks and Velcro fasteners could build their products by hand, at little expense. A pioneering product idea from Procter & Gamble might fit here if there are no current competitors and because, for a company of that size, the financial risks of new product investments can seem relatively small.

   In the upper-right quadrant, high innovation/high risk, novel product ideas are accompanied by high risk because the financial investments are high and the competition is great. A new drug or a new automobile would likely fall into this category.

   Most small business ventures are in the low innovation/high risk cell (lower right). They are fairly conventional entries in well-established fields. New restaurants, retail shops, and commercial outfits involve high investment for the small business entrepreneur and face direct competition from other similar businesses. Finally, the low innovation/low risk category includes ventures that require minimal investment and/or face minimal competition for strong market demand. Examples are some service businesses having low start-up costs and those involving entry into small towns if there is no competitor and demand is adequate.

   How is this matrix useful? It helps entrepreneurs think about their ventures and decide whether they suit their particular objectives. It also helps identify effective and ineffective strategies. You might find one cell more appealing than others. The lower-left cell is likely to have relatively low payoffs but to provide more security. The higher risk/return trade-offs are in other cells, especially the upper right. So you might place your new-venture idea in the appropriate cell and determine whether that cell is the one in which you would prefer to operate. If it is, the venture is one that perhaps should be pursued, pending fuller analysis. If it is not, you can reject the idea or take steps to move it toward a different cell.

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Where would you place Second Life in the Entrepreneurial Strategy Matrix ( Figure 7.2)? How about the company, Millions of Us, whose CEO is shown here with his virtual avatar? Millions of Us is the source for companies looking to establish a marketing foothold in Second Life.

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   The matrix also can help entrepreneurs remember a useful point: Successful companies do not always require a cutting-edge technology or an exciting new product. Even companies offering the most mundane products—the type that might reside in the lower-left cell—can gain competitive advantage by doing basic things differently from and better than competitors.

Real estate is not usually considered a pioneering industry, but it does entail risk. Argentina-born developer Jorge Perez is a businessman familiar with risk. Many people credit him with revitalizing much of Miami, beginning with the building and renovation of affordable housing and garden apartment rentals. While most developers spread to the suburbs of Miami, believing that no one really wanted to live downtown, Perez took the opposite course: he focused entirely on the city itself. He began with a pair of condo towers that he built on the Miami River.

   Today, Perez's company, The Related Group, is responsible for the three towers of the $1.6 billion Icon Brickell hotel and condominiums, another condo development called 500 Brickell, and the Loft 2—all overlooking Biscayne Bay. In all, The Related Group has constructed or renovated 11 major buildings downtown, giving Miami a fresh look and life. “We're going to finally have a center!” Perez boasts. “This is going to be the epicenter right here!” Not content to rest on past accomplishments, Perez has recently turned his sights toward projects in Atlanta and other cities overseas.52

Success and Failure

Success or failure lies ahead for entrepreneurs starting their own companies, as well as for those starting new businesses within bigger corporations. Entrepreneurs succeed or fail in private, public, and not-for-profit sectors; in nations of all stages of development; and in all nations, regardless of their politics.53 <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo3.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

You can find a lot of useful hyperlinks at the MIT Enterprise Forum, http://enterpriseforum.mit.edu/.

 

   Estimated failure rates for start-ups vary. Most indicate that failure is more the rule than the exception. The failure rate is high for certain businesses like restaurants and lower for successful franchises. Start-ups have at least two major liabilities: newness and smallness.54 New companies are relatively unknown and need to learn how to be better than established competitors at something that customers value. Regarding smallness, the odds of surviving improve if the venture reaches a critical mass of at least 10 or 20 people, has revenues of $2 million or $3 million, and is pursuing opportunities with growth potential.55

   Acquiring venture capital is not essential to the success of most start-up businesses; in fact, it is rare. Recent numbers from the Census Bureau say that more than three-fourths of start-up companies with employees were financed by entrepreneurs' own assets or assets of their families. Approximately 1 out of 10 businesses were financed with the owners' credit cards.56 Still, in a recent quarter, venture capital firms invested more than $6 billion in almost 800 deals;57 that's a sizable amount of money, even if the fraction of total new companies is small. And venture capital firms often provide expert advice that helps entrepreneurs improve the odds for success.

   To understand further the factors that influence success and failure, we'll consider risk, the economic environment, various management-related hazards, and initial public stock offerings (IPOs).

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Risk   You learned about risk in Chapter 3. It's a given: Starting a new business is risky. Entrepreneurs with plenty of business experience are especially aware of this. When Chris McGill was evaluating his idea for Mixx.com, a news Web site that could be personalized based on recommendations by users, he was USA Today's vice president of strategy. To make Mixx succeed, McGill knew he would be leaving a well-paying job for an uncertain future in which he had to line up financing and hire talented people in a turbulent business environment. But McGill also concluded that his experience at USA Today and prior management experience with Yahoo News gave him the knowledge and connections for a successful Internet business.59

The 5,000 fastest-growing privately held companies in the United States often started modestly. The median amount of money spent to launch these companies was just $25,000. Most of that money came from the entrepreneurs themselves.58

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   Successful entrepreneurs are realistic about risk. They anticipate difficulties and cushion their business to help it weather setbacks. In downtown Seattle, entrepreneurs Ben and Cindi Raykovich saw a risk when a major construction project began disrupting traffic around their store, Sound Sports. The Raykoviches had built their business around serving running enthusiasts who worked downtown and would stop by on their lunch hour or after work. Concerned that the construction would drive away so much business that the store couldn't survive, they opened a second location in the community of Poulsbo. They intend for the second store to supplement revenue, and if they need to close the first store, they can continue to build their business in Poulsbo. Ben Raykovich is hardly cavalier about the situation: “My life is invested in this business. We need to spread out the risk.”60

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Richard Foos (left), Bob Emmer (center), and Garson Foos are successful entrepreneurs due to their creativity, innovation, and knowledge of their target customers' desires. They are shown here with a circa 1966–67 Batmobile children's arcade ride in their Shout! Factory headquarters in Los Angeles. As CEO of the Shout! Factory, Richard Foos runs an emporium filled with nostalgia-type collectibles.

The Role of the Economic Environment   Entrepreneurial activity stems from the economic environment as well as the behavior of individuals. For example, money is a critical resource for all new businesses. Increases in the money supply and the supply of bank loans, real economic growth, and improved stock market performance lead to both improved prospects and increased sources of capital. In turn, the prospects and the capital increase the rate of business formation. Under favorable conditions, many aspiring entrepreneurs find early success. But economic cycles soon change favorable conditions into downturns. To succeed, entrepreneurs must have the foresight and talent to survive when the environment becomes more hostile.

   Although good economic times may make it easier to start a company and to survive, bad times can offer an opportunity to expand. Ken Hendricks of ABC Supply found a business opportunity in a grim economic situation: a serious downturn in the manufacturing economy of the Midwest contributed to the shutdown of his town's largest employer, the Beloit Corporation. Hendricks purchased the company's buildings and lured a diverse group of new employers to town, in spite of the economic challenges. In fact, Hendricks has a track record of turning around the struggling suppliers that ABC acquires.61 Another silver lining in difficult economic times is that it's easier to recruit talent.

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Business Incubators   The need to provide a nurturing environment for fledgling enterprises has led to the creation of business incubators. Business incubators Protected environments for new, small businesses., often located in industrial parks or abandoned factories, are protected environments for new, small businesses. Incubators offer benefits such as low rents and shared costs. Shared staff costs, such as for receptionists and secretaries, avoid the expense of a full-time employee but still provide convenient access to services. The staff manager is usually an experienced businessperson or consultant who advises the new business owners. Incubators often are associated with universities, which provide technical and business services for the new companies.

   The heyday of business incubators came in the 1990s, when around 700 of them were financing start-ups, mainly emphasizing technology. Eight out of 10 shut down following the collapse of the Internet bubble, but the idea of nurturing new businesses persists. Naval Ravikant, for example, is developing a company tentatively named Hit Forge, which resembles the dot-com incubators. Hit Forge hired four engineers with experience in launching successful Internet concepts. The engineers have wide latitude to try ideas, but they work under strict deadlines. They must go from concept to product within 90 days, and any enterprises that aren't growing after a year will be terminated. Unlike the older-style incubator, Hit Forge lets engineers work from the location of their choice, and the engineers retain half ownership in the ventures they develop. Also, whereas incubators in the 1990s might have spent $2 million developing an idea, today's launches might cost just $50,000.62

Common Management Challenges   As an entrepreneur, you are likely to face several common challenges that you should understand before you face them, and then manage effectively when the time comes. We next discuss several such challenges.

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You Might Not Enjoy It   Some managers and employees can specialize in what they love, whether it's selling or accounting. But entrepreneurs usually have to “do it all,” at least in the beginning. If you love product design, you also have to sell what you invent. If you love marketing, get ready to manage the money, too. This last challenge was almost a stumbling block for Elizabeth Busch, Anne Frey-Mott, and Beckie Jankiewicz when they launched The Event Studio to run business conferences for their clients. All three women had experience with some aspect of running conferences, but when they started their company, they didn't fully think out all the accounting decisions they would need for measuring their income and cash flow. With some practical advice, they learned some basic accounting lessons that helped them avoid tax troubles later on.63 If they hadn't been willing to learn new skills, entrepreneurship might not have been the right career path for them.

Survival Is Difficult   Zappos cofounder Tony Hsieh says, “We thought about going under every day—until we got a $6 million credit line from Wells Fargo.”64 Companies without much of a track record tend to have more trouble lining up lenders, investors, and even customers. When economic conditions cool or competition heats up, a small start-up serving a niche market may have limited options for survival. Gary Gottenbusch worried when orders slowed at his Servatii Pastry Shop and Deli, located in Cincinnati. As a recession hit Ohio hard, customers were deciding that fancy breads and cakes were a luxury they could go without. Servatii might have closed, but Gottenbusch was willing to change. He kept afloat and even added to sales by cultivating new distribution channels (sales in hospitals), new products (distinctive pretzel sticks), and cost-cutting measures (a purchasing association with other bakers in the area).65

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   Failure can be devastating. When Mary Garrison wanted to own a business, she chose the women's fitness industry and decided to buy a franchise from Lady of America Franchise Corporation. But when she held her grand opening, not a single person stopped by. Three months later, she closed. Garrison blames the franchisor for not providing the necessary promotional support, a complaint that Lady of America denies.66

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While still a student at the University of Missouri, Brian Laoruangroch started Green Mobile to buy, refurbish, and resell used cell phones. Originally, Laoruangroch's business was just a profitable hobby. Looking at phone prices on eBay, he concluded he could earn money by buying and reselling phones. He recruited his brother Brett (another University of Missouri student), and they learned how to repair the phones. Then he launched a Web site to sell the phones. While the “Green” in Green Mobile implies the environmental value of recycling phones, the company's advertising emphasizes its low prices—$30 and up.

   As sales grew, keeping up with the business plus school soon got complicated. First Green Mobile began operating a kiosk in a mall. That required employees. Then the company opened a store. That required borrowing. As revenues rose past $500,000, Laoruangroch faced decisions about opening a second store and borrowing from the Small Business Administration. He discovered that managing 30 employees was difficult and not necessarily a profitable scale for his business. He laid off some employees, concluding, “You can get a lot more done with a staff of 14 who care than with 25 or 30 people who don't.”

   With two stores and all the associated challenges, Laoruangroch finds himself working 60 to 80 hours a week—and wondering how he will ever find the time to finish earning his college degree.67


Growth Creates New Challenges   Just one in three Inc. 500 companies keeps growing fast enough to make this list of fastest-growing companies two years running. The reason: They are facing bigger challenges, competing with bigger firms, stretching the founders' capacities, and probably burning cash. Consultant Doug Tatum calls this phase of a company's growth “No Man's Land.”68 It's a difficult transition.

   The transition is particularly complex for entrepreneurs who quickly face the possibility of expanding internationally. Whether a firm should expand internationally soon after it is created or wait until it is better established is an open question. Entering international markets should help a firm grow, but going global is also likely to create challenges that make survival more difficult, especially when the company is young. For instance, when Lou Hoffman decided to expand his public relations (PR) firm to Japan, to grow alongside existing clients, he was prepared for language and cultural differences but not for the high cost of doing business in that country. He first tried partnering with a translation service, figuring they could share expertise and help each other expand. But the translators really weren't interested in the PR business, so a year later, he was staffing the enterprise from scratch. Then Hoffman decided to open a Chinese office, and in that country, he couldn't find anyone familiar with both Chinese business and the creative business culture that had served his agency well. So he hired a Chinese PR staffer who was willing to spend a year at his California headquarters, just absorbing the business culture. That method worked for the Chinese market but flopped when Hoffman tried it for opening a London office; the British employee didn't want to leave the California lifestyle and return home.69 Of course, the risks tend to be lower when entrepreneurs (or their company's managers) have experience in serving foreign markets.70

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   In the beginning, the start-up mentality tends to be “we try harder.”71 Entrepreneurs work long hours at low pay, deliver great service, get good word-of-mouth, and their business grows. At first, it's “high performance, cheap labor.” But with growth comes the need to pay higher wages to hire more people who are less dedicated than the founders. Then it's time to raise prices, establish efficient systems, or accept lower profits. The founder's talents may not spread to everyone else. You need a unique value proposition that will work as well with 100 employees, because hard work or your instincts alone no longer will get the job done. Complicating matters is the continuing growth in customers' needs and expectations.72

   Growth seems to be a consuming goal for most entrepreneurs. But some company founders reach the size where they're happy and don't want to grow any further. Reaching a golden mean is possible.73 Also, sometimes growth needs to be restrained until the company is ready. Only a year after Gregory Wynn, Komichel Johnson, and Robert A. Jones III set up their homebuilding business, JLW Homes and Communities, they had an opportunity to build a 70-unit condominium project called Heritage Pointe. They determined that getting the job done would require a master builder, two assistants, and at least 100 workers. JLW had two master builders, who were already assigned to projects, and too few workers, so the partners reluctantly decided not to take the job. Jones recalls, “It was way too early for us to do this type of deal, … and I'm glad we did [turn it down] because if we didn't, we may have lost our shirts.”74 By carefully planning growth at a sustainable pace, JLW has become a successful Atlanta firm.

 

 

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Entrepreneurs can stabilize their companies’ size, but they still have to keep a high-value business model and provide great customer service.

It's Hard to Delegate   As the business grows, entrepreneurs often hesitate to delegate to other people work that they are used to doing. Leadership deteriorates into micromanagement, in which managers monitor too strictly, to the minutest detail. For example, during the Internet craze many company founders with great technical knowledge but little experience became “instant experts” in every phase of business, including branding and advertising.75 Turns out, they didn't know as much as they thought, and their companies crashed. In contrast, Darren Herman kept his focus on what he knows. While still in his early 20s, Herman took his passion for videogames and his knowledge of marketing and came up with a business idea: IGA Worldwide, which works with advertisers and game developers to place advertising within videogames. Shortly after he had launched IGA, Herman turned over the job of CEO to a more experienced person and named himself “senior business development director,” which means he focuses on spotting new ideas and promoting the company to investors.76

Misuse of Funds   Many unsuccessful entrepreneurs blame their failure on inadequate financial resources. Yet failure due to a lack of financial resources doesn't necessarily indicate a real lack of money; it could mean a failure to properly use the available money. A lot of start-up capital may be wasted—on expensive locations, great furniture, and fancy stationery. Entrepreneurs who fail to use their resources wisely usually make one of two mistakes: they apply financial resources to the wrong uses, or they maintain inadequate control over their resources.

The Inc. 500 companies on the 2006 list started with a median of $75,000 in capital. One company reported starting with just $1.77

 

   This problem may be more likely when a lucky entrepreneur gets a big infusion of cash from a venture capital firm or an initial offering of stock. For most start-ups, where the money on the line comes from the entrepreneur's own assets, he or she has more incentive to be careful. Tripp Micou, founder of Practical Computer Applications, says, “If all the money you spend is based on what you're bringing in [through sales], you very quickly focus on the right things to spend it on.”78 Micou, an experienced entrepreneur, believes that this financial limitation is actually a management advantage.

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Poor Controls   Entrepreneurs, in part because they are very busy, often fail to use formal control systems. One common entrepreneurial malady is an aversion to record keeping. Expenses mount, but records do not keep pace. Pricing decisions are based on intuition without adequate reference to costs. As a result, the company earns inadequate margins to support growth.

   Sometimes an economic slowdown provides a necessary alarm, warning business owners to pay attention to controls. When Servatii Pastry Shop and Deli's sales deteriorated even as the prices of ingredients were rising, owner Gary Gottenbusch pushed himself to go “a little out of [his] comfort zone” and consulted with advisers at the Manufacturing Extension Partnership. Besides encouraging him to innovate, the advisers helped him set goals and monitor progress. One problem Gottenbusch tackled was the price of baking commodities, such as shortening and flour. He partnered with other local bakeries to form a purchasing association that buys in bulk and passes along the savings. Keeping costs down helped Servatii stay profitable when customers were trimming their budgets for baked goods.79

 
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You probably will pay close attention to costs at the beginning, but success sometimes brings neglect. Don’t fall into that trap.

   Even in high-growth companies, great numbers can mask brewing problems. Blinded by the light of growing sales, many entrepreneurs fail to maintain vigilance over other aspects of the business. In the absence of controls, the business veers out of control. So don't get overconfident; keep asking critical questions. Is our success based on just one big customer? Is our product just a fad that can fade away? Can other companies easily enter our domain and hurt our business? Are we losing a technology lead? Do we really understand the numbers, know where they come from, and have any hidden causes for concern?

Mortality   One long-term measure of an entrepreneur's success is the fate of the venture after the founder's death. Founding entrepreneurs often fail to plan for succession. When death occurs, estate tax problems or the lack of a skilled replacement for the founder can lead to business failure.

   Management guru Peter Drucker offered the following advice to help family-managed businesses survive and prosper.80 Family members working in the business must be at least as capable and hard-working as other employees; at least one key position should be filled by a nonfamily member; and someone outside the family and the business should help plan succession. Family members who are mediocre performers are resented by others; outsiders can be more objective and contribute expertise the family might not have. Issues of management succession are often the most difficult of all, causing serious conflict and possible breakup of the firm.

Going Public   Sometimes companies reach a point at which the owners want to “go public.” Initial public stock offerings (IPOs) Sale to the public, for the first time, of federally registered and underwritten shares of stock in the company. offer a way to raise capital through federally registered and underwritten sales of shares in the company.81 You need lawyers and accountants who know current regulations. The reasons for going public include raising more capital, reducing debt or improving the balance sheet and enhancing net worth, pursuing otherwise unaffordable opportunities, and improving credibility with customers and other stakeholders—“you're in the big leagues now.” Disadvantages include the expense, time, and effort involved; the tendency to become more interested in the stock price and capital gains than in running the company properly; and the creation of a long-term relationship with an investment banking firm that won't necessarily always be a good one.82

   Many entrepreneurs prefer to avoid going public, feeling they'll lose control if they do. States Yvon Chouinard of sports and apparel firm Patagonia: “There's a certain formula in business where you grow the thing and go public. I don't think it has to be that way. Being a closely held company means being able to take risks and try new things—the creative part of business. If I were owned by a bunch of retired teachers, I wouldn't be able to do what I do; I'd have to be solely concerned with the bottom line. For us to go public would be suicide.”83

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   Executing IPOs and other approaches to acquiring capital is complex, legalistic, and beyond the scope of this chapter. Sources for more information include The Ernst & Young Guide to Raising Capital, the National Venture Capital Association (www.nvca.org), VentureOne (http://www.ventureone.com), and VentureWire (link to this publication from http://www.venturecapital.dowjones.com/).

Increasing Your Chances of Success

Aside from financial resources, entrepreneurs need to think through their business idea carefully to help ensure its success. We discuss here the importance of good planning and nonfinancial resources. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo5.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

Planning   So you think you have identified a business opportunity. And you have the personal potential to make it a success. Now what? Where should you begin?

The Business Plan   Your excitement and intuition may convince you that you are on to something. But they might not convince anyone else. You need more thorough planning and analysis. This effort will help convince other people to get on board and help you avoid costly mistakes.

   The first formal planning step is to do an opportunity analysis. An opportunity analysis A description of the good or service, an assessment of the opportunity, an assessment of the entrepreneur, specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital. includes a description of the good or service, an assessment of the opportunity, an assessment of the entrepreneur (you), a specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital.84Table 7.3 shows the questions you should answer in an opportunity analysis.

   The opportunity analysis, or opportunity assessment plan, focuses on the opportunity, not the entire venture. It provides the basis for making a decision on whether to act. Then, the business plan A formal planning step that focuses on the entire venture and describes all the elements involved in starting it. describes all the elements involved in starting the new venture.85 The business plan describes the venture and its market, strategies, and future directions. It often has functional plans for marketing, finance, manufacturing, and human resources.

   Table 7.4 shows an outline for a typical business plan. The business plan (1) helps determine the viability of your enterprise, (2) guides you as you plan and organize, and (3) helps you obtain financing. It is read by potential investors, suppliers, customers, and others. Get help in writing up a sound plan!

TABLE 7.3
Opportunity Analysis

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SOURCE: R. Hisrich and M. Peters, Entrepreneurship: Starting, Developing, and Managing a New Enterprise, table, p. 41 Copyright © 1998 by The McGraw-Hill Companies.

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TABLE 7.4
OUTLINE OF A BUSINESS PLAN

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SOURCE: J. A. Timmons, New Venture Creation, 5th ed., p. 374. Copyright © 1999 by Jeffry A. Timmons. Reproduced with permission of the author. © 1999 The McGraw-Hill Companies.

Key Planning Elements   Most business plans devote so much attention to financial projections that they neglect other important information—information that matters greatly to astute investors. In fact, financial projections tend to be overly optimistic. Investors know this and discount the figures. In addition to the numbers, the best plans convey—and make certain that the entrepreneurs have carefully thought through—five key factors: the people, the opportunity, the competition, the context, and risk and reward.86

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   The people should be energetic and have skills and expertise directly relevant to the venture. For many astute investors, the people are the most important variable, more important even than the idea. Venture capital firms often receive 2,000 business plans per year; many believe that ideas are a dime a dozen and what counts is the ability to execute. Arthur Rock, a legendary venture capitalist who helped start Intel, Teledyne, and Apple, stated, “I invest in people, not ideas. If you can find good people, if they're wrong about the product, they'll make a switch.”87

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The three founders of AmieStreet.com, an online music retailer, have created competitive advantage by pioneering a new pricing model. It is the first store where the customers collectively determine the price of music. On AmieStreet.com, most songs start free and increase in price up to 98 cents, based on their popularity among members.

   The opportunity should provide a competitive advantage that can be defended. Customers are the focus here: Who is the customer? How does the customer make decisions? How will the product be priced? How will the venture reach all customer segments? How much does it cost to acquire and support a customer, and to produce and deliver the product? How easy or difficult is it to retain a customer?

   It is also essential to fully consider the competition. The plan must identify current competitors and their strengths and weaknesses, predict how they will respond to the new venture, indicate how the new venture will respond to the competitors' responses, identify future potential competitors, and consider how to collaborate with or face off against actual or potential competitors. The original plan for Zappos was for its Web site to compete with other online shoe retailers by offering a wider selection than they did. However, most people buy shoes in stores, so Zappos cofounders Nick Swinmurn and Tony Hsieh soon realized that they needed a broader view of the competition. They began focusing more on service and planning a distribution method that would make online shopping as successful as visiting a store.88

   The environmental context should be a favorable one from regulatory and economic perspectives. Such factors as tax policies, rules about raising capital, interest rates, inflation, and exchange rates will affect the viability of the new venture. The context can make it easier or harder to get backing and to succeed. Importantly, the plan should make clear that you know that the context inevitably will change, forecast how the changes will affect the business, and describe how you will deal with the changes.

According to the State New Economy Index, the most hospitable states for starting an innovative, new-economy business are Massachusetts, New Jersey, Maryland, Washington, and California.89

 

   The risk must be understood and addressed as fully as possible. The future is always uncertain, and the elements described in the plan will change over time. Although you cannot predict the future, you must contemplate head-on the possibilities of key people leaving, interest rates changing, a key customer leaving, or a powerful competitor responding ferociously. Then describe what you will do to prevent, avoid, or cope with such possibilities. You should also speak to the end of the process: how to get money out of the business eventually. Will you go public? Will you sell or liquidate? What are the various possibilities for investors to realize their ultimate gains?90

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Selling the Plan   Your goal is to get investors to support the plan, so the elements of a great plan, as just described, are essential. It's also important whom you decide to try to convince to back your plan.

   Many entrepreneurs want passive investors who will give them money and let them do what they want. Doctors and dentists generally fit this image. Professional venture capitalists do not, as they demand more control and more of the returns. But when a business goes wrong—and chances are, it will—nonprofessional investors are less helpful and less likely to advance more (needed) money. Sophisticated investors have seen sinking ships before and know how to help. They are more likely to solve problems, provide more money, and also navigate financial and legal waters such as going public.91

   View the plan as a way for you to figure out how to reduce risk and maximize reward, and to convince others that you understand the entire new venture process. Don't put together a plan built on naïveté or overconfidence or one that cleverly hides major flaws. You might not fool others, and you certainly would be fooling yourself.

Nonfinancial Resources   Also crucial to the success of a new business are nonfinancial resources, including legitimacy in the minds of the public and the various ways in which other people can help.

Legitimacy   An important resource for the new venture is legitimacy People's judgment of a company's acceptance, appropriateness, and desirability, generally stemming from company goals and methods that are consistent with societal values.—people's judgment of a company's acceptance, appropriateness, and desirability.92 When the market confers legitimacy, it helps overcome the “liability of newness” that creates a high percentage of new-venture failure.93 Legitimacy helps a firm acquire other resources such as top managers, good employees, financial resources, and government support. In a three-year study tracking business start-ups, the likelihood that a company would succeed at selling products, hiring employees, and attracting investors depended most on how skillfully entrepreneurs demonstrated that their business was legitimate.94

   A business is legitimate if its goals and methods are consistent with societal values. You can generate legitimacy by visibly conforming to rules and expectations created by governments, credentialing associations, and professional organizations; by visibly endorsing widely held values; and by visibly practicing widely held beliefs.95

Networks   The entrepreneur is aided greatly by having a strong network of people. Social capital A competitive advantage in the form of relationships with other people and the image other people have of you.—being part of a social network, and having a good reputation—helps entrepreneurs gain access to useful information, gain trust and cooperation from others, recruit employees, form successful business alliances, receive funding from venture capitalists, and become more successful.96 Social capital provides a lasting source of competitive advantage.97

   To see just some of the ways social capital can help entrepreneurs, consider a pair of examples. Brian Ko, an engineer who founded Integrant Technologies, got useful advice from his investors, including private investors, a bank, and venture-capital firms. One adviser taught Ko that acquiring patents during the start-up phase would help the company stay competitive during the long term, so Integrant spent the money to file applications for 150 patents in six years, positioning the company to protect its ideas as it gains market share and competitors' attention.98

   Tim Litle has developed several successful innovations and businesses as a result of relationships with business school classmates and customers. Early in his career, a friend in politics wanted to target letters to different groups of citizens, and Litle worked with him to figure out how to do that now-common application with computers. He, the politician, and two other partners eventually built a business to provide the same service to marketers.99

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Top-Management Teams   The top-management team is another crucial resource. For example, Sudhin Shahani's start-ups include MyMPO, whose digital media services include Musicane, which lets musicians sell audio and video files and ringtones online at storefronts they create for themselves. The company's head of marketing was singer Will.i.am.100 Having a musician in that top spot may help Musicane build client relationships with other artists. Also, in companies that have incorporated, a board of directors improves the company's image, develops longer-term plans for expansion, supports day-to-day activities, and develops a network of information sources.

Advisory Boards   Whether or not the company has a formal board of directors, entrepreneurs can assemble a group of people willing to serve as an advisory board. Board members with business experience can help an entrepreneur learn basics such as how to do cash-flow analysis; identify needed strategic changes; and build relationships with bankers, accountants, and attorneys. Musicane has an advisory board whose members include Bob Jamieson, the head of BMG Canada.101 Jamieson can contribute inside knowledge of the music industry to complement Shahani's business training, as well as giving the organization credibility to investors and to musicians who might be interested in selling online.

Partners   Often, two people go into business together as partners. Partners can help one another access capital, spread the workload, share the risk, and share expertise. One of the strengths of JLW Homes and Communities, the Atlanta construction business described earlier in this chapter, is that the three founding partners bring different areas of expertise to the business. Gregory Wynn was a master homebuilder, Komichel Johnson was a financial expert, and Robert A. Jones III was a successful salesperson. Johnson explains the advantage this way: “We don't all agree on the same issues, and we've had some heated arguments. … But we realize that through communication and laying out the facts, that we can overcome any issues that may arise within our organization.”102

   Despite the potential advantages of finding a compatible partner, partnerships are not always marriages made in heaven. “Mark” talked three of his friends into joining him in starting his own telecommunications company because he didn't want to try it alone. He learned quickly that while he wanted to put money into growing the business, his three partners wanted the company to pay for their cars and meetings in the Bahamas. The company collapsed. “I never thought a business relationship could overpower friendship, but this one did. Where money's involved, people change.”

   To be successful, partners need to acknowledge one another's talents, let each other do what they do best, communicate honestly, and listen to one another. That's what the partners in JLW Homes did when they turned down a chance to build a project they were understaffed for completing. Johnson, the financial expert, believed the company would make a good return, and Jones, the salesperson, was eager to move ahead, but homebuilder Wynn said the company was unprepared for a project of that size. Johnson and Jones bowed to Wynn's experience and were later glad they did.103 Partners also must learn to trust each other by making and keeping agreements. If they must break an agreement, it is crucial that they give early notice and clean up after their mistakes.




16“For Zappos, the Next Trend Is More Customized Pages for Customers,” InternetRetailer, February 12, 2009, http://www.internetretailer.com; M. Chafkin, “How I Did It: Tony Hsieh, CEO, Zappos.com,” Inc., September 2006, http://www.inc.com.

17.A. Marsh, “Promiscuous Breeding,” Forbes, April 7, 1997, pp. 74–77; and J. Nocera, “Fewer Eggs, More Baskets in the Incubator,” New York Times, October 28, 2006, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

18.L. Kanter, “The Eco-Advantage,” Inc., November 2006, pp. 78–103 (NaturaLawn example on page 84).

19H. Aldrich, Ethnic Entrepreneurs: Immigrant Business in Industrial Societies (Newbury Park, CA: Sage, 1990).

20R. Flandez, “Immigrants Gain Edge Doing Business Back Home,” The Wall Street Journal, March 20, 2007, http://online.wsj.com.

21Timmons and Spinelli, New Venture Creation.

22Michael V. Copeland, “Products for the Other 3 Billion,” Fortune, April 1, 2009, http://money.cnn.com.

23J. Collins and J. Porras, Built to Last (London: Century, 1996).

24M. V. Copeland, “Start Last, Finish First,” Business 2.0, January–February 2006, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

25Collins and Porras, Built to Last.

26K. H. Vesper, New Venture Mechanics (Englewood Cliffs, NJ: Prentice Hall, 1993).

27Kanter, “The Eco-Advantage,” p. 87.

28Vesper, New Venture Mechanics.

29Kanter, “The Eco-Advantage,” p. 84.

30J. Berg, “Entrepreneurs Develop Errand Service,” Patriot-News (Harrisburg, PA), January 23, 2007, http://galenet.galegroup.com.

31Kanter, “The Eco-Advantage,” p. 84.

32Timmons and Spinelli, New Venture Creation.

33P. J. Sauer, “Serving Up Success,” Inc., January 2007, http://www.inc.com.

34International Franchise Association, “Study Reveals Significant Growth of Franchising Sector,” news release, February 23, 2007, http://www.franchise.org; and International Franchise Association, “The Profile of Franchising: 2006,” August 3, 2006, http://www.franchise.org/IndustrySecondary.aspx?id=31604.

35K. Spors, “Franchised versus Nonfranchised Businesses,” The Wall Street Journal, February 27, 2007, http://online.wsj.com.

36Timmons and Spinelli, New Venture Creation.

37R. Gibson, “Learning from Others' Mistakes,” The Wall Street Journal, March 19, 2007, http://online.wsj.com.

38M. V. Copeland and S. Hamner, “The 20 Smartest Companies to Start Now,” Business 2.0, September 2006, downloaded from General Reference Center Gold, http://find.galegroup.com.

39. A. Pasztor, “Sharper Image Sells New Toy: Zero Gravity's Spacey Flights,” The Wall Street Journal, March 28, 2007, http://online.wsj.com; and B. Spillman, “Nothing to These Flights,” Las Vegas Review–Journal, March 5, 2007, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

40A. M. Kukec, “Two Start-Ups Get State Boost to Fight Terrorism,” Daily Herald (Arlington, IL), January 10, 2006; and T. Walsh, “State Venture Capital to Be Put to Work,” Detroit Free Press, August 28, 2006, both downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

41J. E. Lange, “Entrepreneurs and the Continuing Internet: The Expanding Frontier,” in Timmons and Spinelli, New Venture Creation, pp. 183–220.

42Ibid.

43Nielsen//NetRatings, “Resources: Free Data and Rankings,” February 2007, http://www.nielsen-netratings.com, accessed April 24, 2007.

44J. E. Vascellaro, “Selling Your Designs Online,” The Wall Street Journal, April 5, 2007, http://online.wsj.com.

45A. Sipress, “The New Dot-Economy,” Washington Post, December 5, 2006, http://www.washingtonpost.com.

46Timmons, New Venture Creation.

47J. R. Baum and E. A. Locke, “The Relationship of Entrepreneurial Traits, Skill, and Motivation to Subsequent Venture Growth,” Journal of Applied Psychology 89 (2004), pp. 587–98.

48E. Pak, “Twenty-Something Entrepreneurs Are Helping Transform the Surf and Skate Industry,” Orange County Register (Santa Ana, CA), February 23, 2007, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

49Nocera, “Fewer Eggs, More Baskets.”

50Wilson, “Branson”; Richard Branson, “In Defense of Capitalism,” Mail Online, September 25, 2008, http://www.dailymail.co.uk; Peter Pae, “Richard Branson Unveils His Space Plane,” Newsday, July 29, 2008, http://www.newsday.com; Deutschman, “The Enlightenment of Richard Branson”; Farabaugh, “Virgin Group Founder Commits Billions of Dollars.”

51M. Sonfield and R. Lussier, “The Entrepreneurial Strategy Matrix: A Model for New and Ongoing Ventures,” Business Horizons, May–June 1997, pp. 73–77.

52D. J. Lynch, “Executive Suite—Today's Entrepreneur: Miami Magnate Gives City a Makeover,” USA Today, March 11, 2007, http://www.usatoday.com.

53Lange, “Entrepreneurs and the Continuing Internet.”

54S. Venkataraman and M. Low, “On the Nature of Critical Relationships: A Test of the Liabilities and Size Hypothesis,” in Frontiers of Entrepreneurship Research (Babson Park, MA: Babson College, 1991), p. 97.

55Timmons and Spinelli, New Venture Creation.

56P. Hoy, “Most Small Businesses Start without Outside Capital,” Inc., October 3, 2006, http://www.inc.com.

57R. Grant, “The Trade-Offs of Venture Capital,” Mortgage Banking, February 2007, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

58“Just the Facts,” Inc., September 2008, http://www.inc.com; and “Start-Up Capital,” Inc., September 2008, http://www.inc.com.

59Cari Tuna, “Tough Call: Deciding to Start a Business,” The Wall Street Journal, January 8, 2009, http://online.wsj.com.

60H. Dietrich, “Worried about Future Viaduct Construction Woes, Sound Sports Is Planning Ahead,” Minneapolis–St. Paul Business Journal, http://twincities.bizjournals.com, accessed June 14, 2006.

61L. Buchanan, “Create Jobs, Eliminate Waste, Preserve Value,” Inc., December 2006, pp. 94–106.

62M. V. Copeland, “A Studio System for Startups,” Business 2.0, May 2007, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

63Norm Brodsky, “Street Smarts: Our Irrational Fear of Numbers,” Inc., January 2009, http://www.inc.com.

64Chafkin, “How I Did It.”

65Anjali Cordeiro, “Sweet Returns,” The Wall Street Journal, April 23, 2009, http://online.wsj.com.

66Gibson, “Learning from Others' Mistakes.”

67Jacob Stokes, “University of Missouri: A New Life for Old Phones,” Inc., March 2009, http://www.inc.com.

68D. McGinn, “Why Size Matters,” Inc., Fall 2004, pp. 32–36.

69L. Buchanan, “Six Ways to Open an Office Overseas,” Inc., April 2007, pp. 120–21.

70H. Sapienza, E. Autio, G. George, and S. Zahra, “A Capabilities Perspective on the Effects of Early Internationalization on Firm Survival and Growth,” Academy of Management Review 31, no. 4 (2006), pp. 914–33.

71B. Burlingham, “How Big Is Big Enough?” Inc., Fall 2004, pp. 40–43.

72Ibid.

73Kanter, The Eco-Advantage.

74W. Harris, “Team Players,” Black Enterprise, January 2007, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

75S. Finkelstein, “The Myth of Managerial Superiority in Internet Startups: An Autopsy,” Organizational Dynamics, Fall 2001, pp. 172–85.

76Gangemi, “Young, Fearless, and Smart.”

77J. Melloan, “The Big Picture,” Inc., September 2006, http://www.inc.com.

78R. Weisman, “Bootstrappers Avoid Outside Money Ties,” Boston Globe, February 5, 2007, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.

79Cordeiro, “Sweet Returns.”

80P. F. Drucker, “How to Save the Family Business,” The Wall Street Journal, August 19, 1994, p. A10.

81D. Gamer, R. Owen, and R. Conway, The Ernst & Young Guide to Raising Capital (New York: John Wiley & Sons, 1991).

82Ibid.

83A. Lustgarten, “Warm, Fuzzy, and Highly Profitable,” Fortune, November 15, 2004, p. 194.

84R. D. Hisrich and M. P. Peters, Entrepreneurship: Starting, Developing, and Managing a New Enterprise (Burr Ridge, IL: Irwin, 1994).

85Ibid.

86W. A. Sahlman, “How to Write a Great Business Plan,” Harvard Business Review, July–August 1997, pp. 98–108.

87Ibid.

88. Copeland, “Start Last, Finish First.”

89R. D. Atkinson and D. K. Correa, The 2007 State New Economy Index (Ewing Marion Kauffman Foundation and Information Technology and Innovation Foundation, 2007), http://www.kauffman.org; and J. Gangemi, “Ranking the States for the New Economy,” BusinessWeek, February 27, 2007, http://www.businessweek.com.

90Sahlman, “How to Write a Great Business Plan.”

91Ibid.

92M. Zimmerman and G. Zeitz, “Beyond Survival: Achieving New Venture Growth by Building Legitimacy,” Academy of Management Review, 27 (2002), pp. 414–21.

93A. L. Stinchcombe, “Social Structure and Organizations,” in J. G. March, ed., Handbook of Organizations (Chicago: Rand McNally, 1965), pp. 142–93.

94L. Taylor, “Want Your Start-Up to Be Successful? Appearance Is Everything,” Inc., February 23, 2007, http://www.inc.com.

95Ibid.

96R. A. Baron and G. D. Markman, “Beyond Social Capital: How Social Skills Can Enhance Entrepreneurs' Success,” Academy of Management Executive, February 2000, pp. 106–16.

97J. Florin, M. Lubatkin, and W. Schulze, “A Social Capital Model of High-Growth Ventures,” Academy of Management Journal 46 (2003), pp. 374–84.

98E. Ramstad, “In the Land of Conglomerates, Brian Ko Goes His Own Way,” CareerJournal.com, January 4, 2007, http://www.careerjournal.com.

99L. Buchanan, “How I Did It: Tim Litle, Chairman, Litle & Co.,” Inc., September 2006, http://www.inc.com.

100Gangemi, “Young, Fearless, and Smart.”

101Ibid.

102Harris, “Team Players.”

103Ibid.

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