Chapter 06 Entrepreneurship and Starting a Small Business

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. 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 -2

Profile JAY-Z Roc Nation • Founded Roc-A-Fella Records before entering into a joint venture with Def Jam. • Maintains control over the Jay. Z brand - including his clothing line and nightclub chain. • Regarded as a business leader, he has met with Bill Gates, Warren Buffett and former President Bill Clinton. 6 -3

The Age of the Entrepreneur WHAT is ENTREPRENEURSHIP? • Entrepreneurship -Accepting the risk of starting and running a business. • Opportunity • Profit • Independence • Challenge 6 -4

Why People Take the Entrepreneurial Challenge LG 1 WHAT DOES IT TAKE to be an ENTREPRENEUR? • Self-directed • Self-nurturing • Action-oriented • Highly energetic • Tolerant of uncertainty 6 -5

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 middleand high school age kids on college campuses. • Sam Hogg – Started Gift. Zip. com, an electronic gift card aggregator site. • John Goscha – Created Idea. Paint after many nights of brainstorming led to enormous sheets of paper plastered all over his dorm walls. • Paula Dean – American cook; opened her first restaurant after the age of 50+ 6 -6

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 -7

Why People Take the Entrepreneurial Challenge LG 1 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 -8

Entrepreneurial Teams ENTREPRENEURIAL TEAMS LG 1 • 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 -9

Micropreneurs and Home-Based Businesses MICROPRENEURS LG 1 • Micropreneurs -- Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle. • About half of U. S. micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc. • Nearly 60% of home-based micropreneurs are men. 6 -10

Micropreneurs and Home-Based Businesses LG 1 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. • Comes with challenges…and benefits… 6 -11

Web-Based Businesses ONLINE BUSINESS LG 1 • 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%. • Excellent opportunity for entrepreneur business growth. 6 -12

Web-Based Businesses AFFILIATE MARKETING LG 1 • 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 -13

Entrepreneurship Within Firms INTRAPRENEURS LG 1 • 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 3 M developed Post-Its when he was trying to mark pages of his hymnal without damage. 6 -14

Encouraging Entrepreneurship: What Government Can Do LG 1 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 -15

Small Versus Big Business SMALL BUSINESSES LG 2 • 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. • Statistically – small business add economic stability and wealth 6 -16

Importance of Small Business LG 2 ADVANTAGES of SMALL OVER BIG BUSINESS • More personal customer service. • The ability to respond quickly to opportunities. • Business failures are less – failures are used as new opportunities Photo Courtesy of: Elliot Brown 6 -17

Small Business Success & Failure THEY DID WHAT? LG 2 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 -18

Learning About Small Business Operations LG 3 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 -19

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 -20

Managing a Small Business LG 4 SMALL BUSINESS AND MAJOR BUSINESS FUNCTIONS • Planning • Financing • Knowing customers • Managing employees • Keeping records 6 -21

Begin with Planning BUSINESS PLANS LG 4 • 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 -22

Writing a Business Plan WRITING a BUSINESS PLAN LG 4 • 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 -23

Writing a Business Plan LG 4 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 -24

Getting Money to Fund a Small Business SOURCES of CAPITAL LG 4 • 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. • Community Development Financial Institutions • Social Lending • Community Advantage and Small Loan Advantage Program 6 -25

The Small Business Administration LG 4 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 -26

The Small Business Administration LG 4 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. • Small Business Development Centers (SBDC) -- evaluate the feasibility of your idea, develop your business plan and complete your funding application – for no charge. 6 -27

Knowing Your Customers The MARKET LG 4 • 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 -28

Managing Employees MANAGING EMPLOYEES LG 4 • 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 -29

Keeping Records ACCOUNTING ASSISTANCE LG 4 • 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 -30

Looking for Help LEGAL HELP LG 4 • 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 -31

Looking for Help MARKETING RESEARCH LG 4 • 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 -32

Looking for Help OTHER FORMS OF HELP LG 4 • 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 -33

EMERGING MARKETS, EMERGING ENTREPRENEURSHIP (Reaching Beyond Our Borders) • Small Business prospects abroad • 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 -34