Chapter 1 The Power of Entrepreneurship Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Definition of entrepreneurship Schumpeter An entrepreneur is the person who destroys the existing economic order by introducing new products and services, by introducing new methods of production, by creating new forms of organization, or by exploiting new raw materials. Simpler An entrepreneur is the person who perceives an opportunity and creates an organization to pursue it. Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Business in the US Part-time employees 24 million businesses 99. 5% are small businesses (with 500 or fewer employees) Full-time employees Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © Have only 1 employee
10 -year survival rates of business establishments 81 % survive 40 % survive 1 year 5 years 2 years 65 % survive Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © 10 years 25 % survive
Entrepreneurship Revolution Strikes Gold Netscape Communications: $6 million of own money + $6 million of VC money = $2. 2 billion of market capitalization on the first day of IPO 182% ROI e. Bay: Benchmark Capital’s investment of $5 million in e. Bay multiplied 1500 -fold in just two years Venture capital is only appropriate for high potential growth companies like these, Google, and Facebook. Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Venture Capital Investments in Internet-related companies 4500 4000 3000 1000 $70 $60 $50 Yahoo IPO 1996 2500 1500 $80 Amazon. com IPO 1997 3500 2000 $90 e. Bay IPO 1998 $40 Netscape IPO 1995 $30 $20 $10 500 0 $0 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 Number of Companies Source: Venture Economics Total Invested Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © Total Invested ($ billion) Number of Companies 5000
Changes in the Entrepreneurial Framework Conditions Education, Professionalization Training Changes in any one or several of these conditions can lead to entrepreneurial opportunities Cultural and Social Financial Norms Human Government Infrastructure Physical Infrastructure R&D transfer Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
R&D observations • Innovations don’t travel well within university communities without a significant investment in developing networks and marketing concepts • Innovators are rarely entrepreneurs – No one wants to run a business – No one uses the word “opportunity” – they solve problems Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
TEA (total entrepreneurial activity) is the percent of the adult population that are either nascent entrepreneurs or baby businesses’ owner-managers or both. It measures the overall entrepreneurial activity of a nation. Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © AVERAGE 45. 00 40. 00 35. 00 30. 00 25. 00 20. 00 15. 00 10. 00 5. 00 Japan Slovenia Hong Kong Belgium Sweden Croatia Portugal Hungary Italy Finland Germany Netherlands Spain Denmark South Africa Singapore Greece France United Kingdom Israel Norway Ireland Poland Canada United States Argentina Australia Brazil Iceland New Zealand Jordan Ecuador Uganda Peru #/ 100 Adults, 18 -64 Years Old [95% Confidence Interval] Total Entrepreneurial Activity [TEA Prevalence] 2004: By Country
TEA (Opportunity)/TEA (Necessity) 2004 18. 00 16. 00 14. 00 12. 00 10. 00 8. 00 6. 00 4. 00 2. 00 0. 00 2 R = 0. 57 0 10, 000 20, 000 30, 000 40, 000 50, 000 60, 000 GDP per capita, US$ TEA (opportunity) is the percent of the adult population that are trying to start or have started a baby business to exploit a perceived opportunity. TEA (necessity) is the percent of adults who are trying to start or have started a baby business because all other options for work are either absent or unsatisfactory. Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
TEA 2004: by Age Categories and Country Income Group #/ 100 Adults, 18 -64 Years Old 25 18 -24 years 25 -34 year 35 -44 years 20 45 -54 years 55 -64 years 15 10 5 0 low income countries middle income countries high income countries Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
35. 0 0. 0 Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © AVERAGE 40. 0 Japan Slovenia Hong Kong Belgium Sweden Croatia Portugal Hungary Italy Finland Germany Netherlands Spain Denmark South Africa Singapore Greece France United Kingdom Israel Norway Ireland Poland Canada United States Argentina Australia Brazil Iceland New Zealand Jordan Ecuador Uganda Peru #/ 100 Adults, 18 -64 Years Old TEA 2004: by Gender 45. 0 Women Men 30. 0 25. 0 20. 0 15. 0 10. 0 5. 0
TEA 2004: Education by Country Income Group (GDP per capita) up to some secondary degree post secondary high income countries >$25, 000 middle income countries low income countries >$10, 000 0% 20% 40% 60% Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © 80% 100%
Informal investment and classic venture capital as percent of GDP 2. 50 2. 00 0. 00 Hungary Finland Norway Portugal Slovenia France Ireland UK Japan Italy Belgium Sweden Australia South Africa Hong Kong Spain USA Germany Netherlands Denmark Canada Israel Switzerland Singapore Poland Greece New Zealand Informal Investment and Classic Venture Capital Percent of GDP 3. 00 Classic venture capital Informal investment 1. 50 1. 00 0. 50 Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
21 ST CENTURY ECONOMIES: ANGLO-SAXON OR SOCIAL MODELS? Anglo. Saxon Economic Systems Anglo-Saxon economic systems have a high prevalence rate of high-expectation entrepreneurial activity. Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Chapter 2 The Entrepreneurial Process Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Entrepreneurship Defined: Entrepreneur: someone who perceives an opportunity and builds an organization to pursue that opportunity. Entrepreneurship involves all the functions, activities, and actions associated with perceiving opportunities and creating organizations to pursue them. These include: –Market and Customer Research –Service and Product Innovation –Team Building –Finding & Managing Resources –Leadership –Etc…
Factors Influencing the Decision to Start a Company Personal Attributes • Higher Internal Locus of Control • Desire for Financial Success • Desire to Achieve Self-Realization • Desire for Recognition • Joy of Innovation • Risk Tolerance Environmental Factors • Local, Regional, or National attitudes towards entrepreneurship • Social and cultural pressures for or against risk taking and entrepreneurship • Access to entrepreneurial role models • Responsibilities to family and community Remember: No single type of person is best suited for entrepreneurship! Entrepreneurs come from all walks of life, backgrounds, etc!
Before Making the Commitment Would be Entrepreneurs Must: 1) Assess their own financial reality. It can be very difficult to sustain a salary in the early years of starting a new business, and as a result it is essential for would be entrepreneurs to work through their own personal income needs. If they have a family or other responsibilities that make taking a financial risk more difficult, entrepreneurs must complete an honest assessment of whether and when the company will be able to match past salary levels. 2) Identify key contacts in their networks. The people in an entrepreneur’s network are his or her greatest potential source of capital, clients, employees, and feedback. Before jumping into an entrepreneurial endeavor it’s essential to take an inventory of the resources in one’s network. 3) Reach out to sources of free advice and feedback. Most people root for the underdog, and as a result would be entrepreneurs have at their disposal the advice and good will of countless people in their communities and the business world at large. The best entrepreneurs reach out to these communities for all the free advice and wisdom they can get.
The Timmons Model for Entrepreneurial Success:
The Tenets of the Timmons Model: 1) The Opportunity –Is there a clear customer need for the proposed product or service? –Is the timing right: is the team ready, is the market ready? –Ideas are a dime a dozen – it’s the combination of the factors above and the execution of the business plan that makes an idea an opportunity. 2) The Lead Entrepreneur and Management Team –Experience within the proposed industry can be essential to success. –Investors and other backers prefer to see a track record of driving growth and profits. –An ‘A’ team with a ‘B’ idea is almost always better than the opposite. 3) The Resources –Resources include capital, technology, equipment, and most importantly – people. –The entrepreneur’s mantra is one of Low Overhead, High Productivity, and Controlling but not Owning resources. –The best entrepreneurs are incredibly creative at finding ways to get things done inexpensively and effectively. You can always find ways to do things faster, cheaper, or better!
There are Two Key Forms of Start Up Capital Debt • Requires no transfer of ownership of the company. • Presents potential for higher risk for the entrepreneur. • Requires repayment, and therefore careful cash flow planning. Equity • Investors gain an ownership stake in the company through a transfer of shares. • This transfers most of the risk to the investor, which explains the costs and expected returns. • Does not require repayment, but does require careful capital planning and investment. Remember: Most companies will never take on outside investors, and many will never use debt financing for growth.
A Sample Financing Path: Personal Savings & Sweat Equity Angel Investment Bank & SBA Loans Initial Public Offering Venture Capital
Happiness is a Positive Cash Flow! It’s Essential to Understand the Difference between Profits and Cash Flow: –A profitable company can have a negative cash flow and risk running out of money. –An unprofitable company can have a positive cash flow and be on a healthy trajectory. Profit is measured as a Gain or Loss on the Income Statement, however… –It is typically measured on an accrual basis, and therefore does not accurately reflect the cash inflows and outflows of the company. –Some transactions of cash occur off the Income Statement, and therefore impact cash flow but not profits. A good example is repayment of a loan, which reduces cash balances but has no impact on profits or losses. Cash Flow measures the increase/decrease of cash during a given timeframe: –It is comprised of three elements: operations, investing, and financing. –Each of these areas can have a tangible impact on the Cash Flows of a business, and must be planned and monitored closely. –Positive or Negative Cash Flows are not necessarily good or bad on their own. What matters is the context – is the company growing, struggling, etc?
Chapter 3 Opportunity Recognition, Shaping and Re-shaping Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Idea-to-opportunity transition Seed of idea Passion Idea Professional Experience Idea Multiplication Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © Viable Opportunity
Idea multiplication – IDEO technique 1 Gather Stimuli Observe 2 Multiply Stimuli Brainstorm/brain-write 3 Create Customer Concepts Build a simple mock up 4 Optimize Practicality Add/remove features Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
The opportunity space Global Business Environment Competitors Suppliers Your Company Customers Government Regulations Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © Competitors
The customer Target Audience Categories Primary Target Audience Secondary Target Audience Tertiary Target Audience Common Demographic/Psychographic Categories Demographics Age Gender Household Income Family Size/Family Lifecycle Occupation Education Level Religion Ethnicity/Heritage Nationality Social Class Marital Status Psychographics Social group (e. g. , white collar, blue collar, etc. ) Lifestyle (e. g. , mainstream, sexual orientation, materialistic, active, athletic, etc. ) Personality Traits (Worriers, Type A’s, Shy, Extroverted, etc. ) Values (Liberal, Conservative, Open. Minded, Traditional, etc. ) Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Macro trends Important Trends over the Last 50 Years Trend Impact Baby Boom Generation Pampers, Rock & Roll, Television, Minivans, Real Estate, Mc. Mansions, etc. Personal Computing Internet, media on demand, electronic publishing, spreadsheets, electronic communication Obesity Drain on healthcare system, growth of diet industry, changes in food industry, health clubs, home gyms Dual-Income households Child care, Home services – landscaping, house cleaning, prepared foods Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
1 s 2 O ol Ph esc as en e ce bs C om N ew En pet te ito r r O Wi pp nd or ow tu ni of ty Market Adoption S-curve 3 Time Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Setting prices Price Penetration Pricing Strategy Cost-plus Pricing Strategy Assessing Market Prices for Competing Products Strategy Requires Enormous Financing Price May Not Match The Value The Best Option Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Reaching customer – the value chain Example - Value Chain of Gourmet Chili 2530% GM GS CO 1535% GM Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © 7075% Grocery Stores 6585% GS GM 2030% 7080% GS CO GM 1025% 7590% GS CO Food Distributors Gourmet Chili CO Base Ingredients -Beef, Sauce, etc. -From Food Distributor
Learning about “stealth” competitors Business Angels and VCs Sources Of Intelligence Suppliers Databases Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Opportunity checklist Customer Trends Competition Vendors Government Global Environment Market size Price/ Frequency/ Value Market Growth Distribution Key Success Factors Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©
Chapter 4 Understanding your Business Model and Developing your Strategy
Basic strategy categories are: ØDifferentiation ØLow cost ØNiche
Business model Revenue categories Cost model Cost of Goods Sold Operating Costs
Amazon. com’s Revenue Model Total revenues
Amazon. com’s cost model Total costs and expenses
Several key aspects about capturing a first mover’s advantage Ø You have to be first (or very early) into the market Ø You need to capture a large percentage of the market quickly Ø You need to create switching costs so the customer will stick with you Ø Very expensive, hard to win Ø First Movers rarely win
Attributes of winning strategies Cheaper Faster Better
Entry Strategy Benchmark Devise Initial Market Test Create a Platform
Growth Strategy Franchising Expanding your product mix Geographic expansion
Benefits of franchising Adds new revenues Speeds growth
Factors defining success of geographic expansion Customers Vendors Distribution
The Entrepreneurial Firm International Expansion Process
Means to expand globally Pros Cons Technology Transfer - Reduces entry costs - Risk of losing the technology Technology Licensing - Generates revenue - Conserves resources - A lost opportunity to extend your own brand Outsourcing - Cost-saving Exporting - Cheap - Easy - Additional costs in after-sales support and transportation - Moral hazard Foreign Direct Investment (FDI) - Physical presence - Control of assets - Expensive Franchising - Licenses an operational system - Risk of damaging the brand name Venture financing - Both an enabling and an enacting mechanism - Often leads to mergers and acquisitions with foreign companies Mergers and acquisitions (M&A) - Established infrastructure - Allow a company to grow and expand quickly - Very expensive
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