Chapter 06
Entrepreneurship
and Starting a
Small Business
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Six
LEARNING GOALS
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.
6-2
Chapter Six
LEARNING GOALS
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.
6-3
Profile
JAY-Z
Roc Nation
• Founded Roc-A-Fella Records
before entering into a joint
venture with Def Jam.
• Maintains control over the JayZ 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.
6-4
Chapter Six
NAME that COMPANY
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!
6-5
The Age of the
Entrepreneur
WHAT is ENTREPRENEURSHIP?
• Entrepreneurship -Accepting the risk of
starting and running a
business.
6-6
The Job-Creating
Power of
Entrepreneurship
in the U.S.
NOTABLE ENTREPRENEURS
• 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.
6-7
SUCCESS KNOWS NO AGE
(Spotlight on Small Business)
• 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.
6-8
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.
Source: Entrepreneurship, April 2010.
6-9
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.
Source: U.S. News and World Report, October 2010.
6-10
Why People
Take the
Entrepreneurial
Challenge
WHY TAKE the RISK?
LG1
• Opportunity
• Profit
• Independence
• Challenge
6-11
Why People
Take the
Entrepreneurial
Challenge
LG1
WHAT DOES IT TAKE to be an
ENTREPRENEUR?
• Self-directed
• Self-nurturing
• Action-oriented
• Highly energetic
• Tolerant of uncertainty
6-12
Why People
Take the
Entrepreneurial
Challenge
LG1
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.
Source: Entrepreneur, May 2010.
6-13
Turning Your
Passion and
Problems into
Opportunities
LG1
An IDEA is a
GOOD OPPORTUNITY IF…
• 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.
6-14
Entrepreneurial
Teams
ENTREPRENEURIAL TEAMS
LG1
• 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.
6-15
Micropreneurs
and Home-Based
Businesses
MICROPRENEURS
LG1
• 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 homebased business owners – writers, consultants,
video producers, architects, bookkeepers, etc.
• Nearly 60% of home-based micropreneurs are
men.
6-16
Micropreneurs
and Home-Based
Businesses
LG1
HOME-BASED BUSINESS
GROWTH
• Computer technology has leveled the playing
field.
• Corporate downsizing has led many to venture on
their own.
• Social attitudes have
changed.
• New tax laws have
loosened restrictions on
deducting expenses for
home offices.
6-17
Micropreneurs
and Home-Based
Businesses
LG1
HOME-BASED BUSINESS
ISN’T EASY
• 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.
6-18
Micropreneurs
and Home-Based
Businesses
LG1
•
•
•
•
•
•
•
•
•
BENEFITS of HOME-BASED
BUSINESSES
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
6-19
Micropreneurs
and Home-Based
Businesses
LG1
DOWNSIDES of HOME-BASED
BUSINESSES
•
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
6-20
Micropreneurs
and Home-Based
Businesses
LG1
THINK YOU’RE READY
to WORK from HOME?
Yes?
No?
If I don’t know the answer, I can figure it out.
I’m hardworking, self-directed and disciplined.
I’m organized and can multitask.
I don’t mind working long hours or weekends.
I regularly set goals and measure progress.
I’m happy being alone.
I’m an excellent communicator.
I can create relationships with people I’ve never met.
I’m productive on my own.
My family and friends don’t expect me to be available
when I’m working at home.
Source: Entrepreneur, June 2010.
6-21
Web-Based
Businesses
ONLINE BUSINESS
LG1
• 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%.
6-22
Web-Based
Businesses
AFFILIATE MARKETING
LG1
• 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.
6-23
Web-Based
Businesses
LG1
BOOSTING YOUR BUSINESS’S
ONLINE PRESENCE
• Establish an identity.
• Be easy to find.
• Steal good ideas and
make them your own.
• Look out for
opportunities.
• Remember other forms
of marketing.
Photo Courtesy of: Marc Wathieu
• Be friendly!
Source: Entrepreneur, May 2010.
6-24
Entrepreneurship
Within Firms
INTRAPRENEURS
LG1
• 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.
6-25
Encouraging
Entrepreneurship:
What Government
Can Do
LG1
GOVERNMENT and
ENTREPRENEURSHIP
• 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.
6-26
Progress
Assessment
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 webbased businesses?
6-27
Small Versus
Big Business
SMALL BUSINESSES
LG2
• 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.
6-28
Small Versus
Big Business
SMALL BUSINESS STATISTICS
LG2
• 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.
6-29
Importance of
Small Business
LG2
ADVANTAGES of SMALL OVER
BIG BUSINESS
• More personal customer service.
• The ability to respond quickly to opportunities.
Photo Courtesy of: Elliot Brown
6-30
Small Business
Success &
Failure
LG2
BUSINESS FAILURES are LOWER
THAN the REPORTS BECAUSE…
• 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.”
6-31
Small Business
Success &
Failure
THEY DID WHAT?
LG2
Famous Business Failures
• Tommy Hilfiger – First store went bankrupt
• Milton Hershey – First confectionery failed
• H.J. Heinz – Company went bankrupt six years after
start
• Walt Disney – First film company
went bankrupt
• Henry Ford – First two car
companies failed
• L.L. Bean – Almost went bankrupt
in first year
Source: World Features Syndicate.
6-32
Learning About
Small Business
Operations
LG3
LEARNING ABOUT
SMALL BUSINESS
• 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.
6-33
GOING DOWN with the SHIP
(Making Ethical Decisions)
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?
6-34
Managing a
Small Business
MAJOR BUSINESS FUNCTIONS
LG4
• Planning
• Financing
• Knowing customers
• Managing employees
• Keeping records
6-35
Begin with
Planning
BUSINESS PLANS
LG4
• 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.
6-36
Writing a
Business Plan
WRITING a BUSINESS PLAN
LG4
• A good plan takes a long time to prepare.
• A good executive summary catches interest and
tempts potential investors to read on.
• Getting the plan into
the right hands is
almost as important
as getting the right
information in it.
6-37
Writing a
Business Plan
LG4
A FAMILY AFFAIR
What to Consider Before Starting a Family Business
• 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.
Source: Bloomberg Businessweek, www.businessweek.com, accessed June 2011.
6-38
Getting Money
to Fund a Small
Business
SOURCES of CAPITAL
LG4
• 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.
6-39
Getting Money
to Fund a Small
Business
LG4
FUNDING YOUR DREAM
Getting Cash When Financing Isn’t an Option
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.
Source: Inc., October 2010.
6-40
Getting Money
to Fund a Small
Business
LG4
COMMUNITY DEVELOPMENT
FINANCIAL INSTITUTIONS
• 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!
6-41
SOCIAL LENDING
(Social Media in Business)
• 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.
6-42
The Small
Business
Administration
LG4
The SMALL BUSINESS
ADMINISTRATION
• 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.
6-43
The Small
Business
Administration
LG4
The SMALL BUSINESS
INVESTMENT COMPANY
• 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.
6-44
The Small
Business
Administration
LG4
SMALL BUSINESS
DEVELOPMENT CENTERS
• 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.
6-45
The Small
Business
Administration
LG4
COMMUNITY ADVANTAGE and
SMALL LOAN ADVANTAGE PROGRAM
• 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.
6-46
The Small
Business
Administration
LG4
HELP PLEASE!
More SBA Resources and Other Helpful Groups
•
Small Business
Investment Companies
•
The Office of
Innovation &
Entrepreneurship
•
SCORE
•
Entrepreneurship.org
Source: Inc., October 2010.
6-47
Knowing Your
Customers
The MARKET
LG4
• 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.
6-48
Managing
Employees
MANAGING EMPLOYEES
LG4
•
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.
6-49
Keeping Records
ACCOUNTING ASSISTANCE
LG4
• 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.
6-50
Looking for Help
LEGAL HELP
LG4
• 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
6-51
Looking for Help
MARKETING RESEARCH
LG4
• 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.
6-52
Looking for Help
OTHER FORMS OF HELP
LG4
• A commercial loan officer can help:
-
Design an acceptable business plan.
Give financial advice.
Lend money.
• An insurance agent can help you:
-
Know the risks associated with the business.
How to cover risks with insurance.
How to prevent risks with safety devices.
• Service Corps of Retired Executives
-
More than 10,500 volunteers from industry, trade
associations, and education who counsel small
business at no cost.
6-53
Progress
Assessment
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?
6-54
Going
International:
Small Business
Prospects
LG5
SMALL BUSINESS PROSPECTS
ABROAD
• 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.
6-55
EMERGING MARKETS,
EMERGING ENTREPRENEURSHIP
(Reaching Beyond Our Borders)
• 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.
6-56
Progress
Assessment
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?
6-57