Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business You can't cross the sea merely by standing

and staring at the water. --Rabindranath Tagore It's not how many times we stumble and fall down that matters. It's how many times we stumble and get back up that counts. --Max arey! "r. Learning Ob ectives #tudents will be able to$ %. &efine the role of the entrepreneur in the '.#. economy. (. &escribe the entrepreneurial profile. ). &escribe the benefits of owning a small business. *. &escribe the potential drawbacks of owning a small business. +. ,xplain the forces that are dri-ing the growth in entrepreneurship. .. &iscuss the role of di-ersity in small business and entrepreneurship. /. &escribe the contributions small businesses make to the '. #. economy. 0. ,xplain the reasons small businesses fail. 1. 2ut business failure into the proper perspecti-e. %3. ,xplain how small business owners can a-oid the ma4or pitfalls of running a business. !nstructor"s Outline I. Introduction 5. The dramatic resurgence of the entrepreneurial spirit$ %. 5 recent study by the 6ational 2anel #tudy of '.#. 7usiness #tart-'ps found that 0 million people! or one in (+ adults! were acti-ely engaged in trying to launch a new business. (. This resurgence of the entrepreneurial spirit is the most significant economic de-elopment in recent business history. ). ,ntrepreneurs ha-e introduced inno-ati-e products and ser-ices! pushed back technological frontiers! created new 4obs! opened foreign markets. *. 5s a result! they sparked the '.#. economy into regaining its competiti-e edge in the world. +. In %1.1! entrepreneurs created (/*!333 new corporations8 today! the number of new incorporations exceeds 033!333 per year. .. In a recent sur-ey of college seniors! *1 percent of the men and )% percent of the women said they were interested in pursuing entrepreneurship when they graduate.
7. Increase in launch of new business$ %. &ue to new technological de-elopments! it is possible for companies to

accomplish more with fewer people. 5s a result! people who once saw launching a business as being too risky now see it as the ideal way to create their own 4ob security.
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#ection I - The hallenge of ,ntrepreneurship

(. 5lthough launching a business is ne-er easy! the resources a-ailable today make

the 4ob much simpler today than e-er before since thousands of colleges and uni-ersities offer courses in entrepreneurship. ). Internet hosts a sea of information on launching a business including sources of capital. *. 5nother significant shift in growth of small company has been due to significant shift in our nation's economic structure 9rapidly mo-ing away from an industrial economy to a knowledge-based one:. ;hat is an entrepreneur< &efinition 5n entrepreneur is one who creates a new business in the face of risk and uncertainty for the purpose of achie-ing profit and growth opportunities and assembles the necessary resources to capitali=e on those opportunities.
II. 5. %.

I6 T>, ?@@T#T,2# @? 56 ,6TR,2R,6,'R A ?rom the Ice 5ge to @uter #pace Two characteristics common to entrepreneurs are creati-ity and an eye for opportunity. 5n @pportunity from the Ice 5ge. Ronald #tamp has an idea about how to use the /+3 or so icebergs that break off from glaciers each year and drift south past Breenland into the 5tlantic. #tamp! a former fish wholesaler! is lassoing icebergs and melting them down to make spring waterC Recogni=ing the marketing potential of water made from glacial ice! #tamp has an eye on tapping into the D)3 billion-a-year bottled water business. The first obstacle #tamp faced was figuring out how to capture icebergs and process them. #tamp met 2aul 7enson! owner of a spring water business! and the two formed Iceberg Industries. In addition to raising D+33!333 from in-estors! #tamp and 7enson finally de-eloped a workable method for har-esting icebergs. They purchased a barge with heated tanks onboard and con-erted it into a floating water factory. @utfitted with a crane and a hydraulic grapple originally designed to bite chunks out of granite! the barge is towed by a tugboat into the 5tlantic each spring! where it spends the next eight months har-esting icebergs. The tugboat lassos the iceberg and pulls it next to the barge! where the grapple bites off a half-ton chunk of ice. 5nother de-ice eEuipped with rotating steel teeth crushes the ice before it goes into the heating tanks. There! the ice is melted and filtered. @nce the holding tanks are filled! the tug tows entire barge to Iceberg IndustriesF processing plant in 6ewfoundland! where final filtering and bottling takes place. Iceberg Industries went public in (333! but its two founders still own %+ percent of the companyFs stock. In addition to its line of bottled water! Iceberg Industries has partnered with other 6ewfoundland businesses to produce beer 97orealis Iceberg 7eer: and -odka 97orealis Iceberg Godka: with its pure water. ,ntrepreneurs in #pace. #ince ongress passed the ommercial #pace 5ct! which legali=ed pri-ate manned space flights! in %11/. @ne organi=ation! the H 2RII, ?oundation! is offering D%3 million to the first

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness $

entrepreneur who can build a spacecraft that carries three people .( miles into space twice within two weeks. 5lthough no one has Eualified for the D%3 million pri=e yet! some entrepreneurs are not waiting to get into the space tourism business. #pace 5d-entures Jtd. is booking passengers on a -ariety of space-related ad-enture -acations! ranging from terrestrial tours of Meteor rater to high-altitude flights in Russian MiB fighter 4ets. Top Bun wannabes can fly with an experienced pilot at speeds of up to Mach (.+ 9%!0+3 miles per hour: and altitudes up to 03!333 feetC 5irborne thrills donFt come cheap! howe-er8 prices range from D)!*33 up to D%)!333. ustomers also can experience weightlessness like astronauts in outer space without e-er lea-ing earthFs atmosphere on the Russian-built ?lying Jaboratory 9nicknamed the KGomit ometL:. 5s the plane flies in a series of parabolic cur-es! its occupants experience about (+ seconds of =ero gra-ity. #pace 5d-enturesF most ambitious pro4ect is a sub-orbital space flight that will take ad-enturers %33 kilometers into space. The fact that the company does not yet ha-e a -ehicle capable of accomplishing this mission has not slowed down hopeful space tra-elers. 5lready! more than %33 people ha-e paid the D.!333 deposit to reser-e a spot on the D10!333 two-hour trip into space. The company has agreements with six of the most promising companies working to build reusable space -ehicles! so #pace 5d-entures customers will be among the first tourist to tra-el into space when a -ehicle is a-ailable. %. 5ssume that you are a banker and these entrepreneurs approached you with a loan reEuest to start these companies. ;hat Euestions will you ask them< ;ould you appro-e the loan< ,xplain. %ns&er: The discussion should focus on the e-idence of the -iability of these businesses and what personal commitment the entrepreneurs ha-e in them! i.e.! personal in-estment. (. 'sing these business -entures as a source of inspiration! work in a team with two or three of your classmates to generate ideas for unusual business -entures that you could start. %ns&er: ,ach group will ha-e different idea. #tudent should consider the market -iability of their business -entures. ). #elect one idea from those your team generated in Euestion (. ;hat could you do to con-ince skeptical lenders or in-estors to put money into your company and to increase the probability of its success< %ns&er: #tudentFs answer will -ary. >owe-er! students must understand that in regards to money! both lenders and in-estors reEuire solid financial documentations! forecasting the success probability.
7. %. (. ). *. +. . %.

hoosing entrepreneurship$ >a-e been downsi=ed or laid off ;anted to fulfill lifelong goal Tired of working for someone else ;anted more control o-er future "oined family business ,ntrepreneurial profile &esire for responsibility.

+M (+M (/M ).M *%M

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#ection I - The hallenge of ,ntrepreneurship

They prefer to be in control of their resources and to use those resources to achie-e self-determined goals. (. 2reference for moderate risk. a: ,ntrepreneurs are not wild risk-takers! but are instead calculating risktakers. ). onfidence in their ability to succeed. a: They need to be optimistic about the chances for success. *. &esire for immediate feedback. a: ,ntrepreneurs like to know how they are doing and are constantly looking for reinforcement. +. >igh le-el of energy. a: ,ntrepreneurs are more energetic than the a-erage person. Typically! they work long hours! often .3 to 03 hours a week. .. ?uture orientation. a: ,ntrepreneurs tend to dream big and then formulate plans to transfer those dreams into reality. /. #kill at organi=ing. a: ,ntrepreneurs know how to put the right people and resources together to accomplish a task. 0. Galue achie-ement o-er money. a: 5chie-ements seems to be the primary moti-ating force behind entrepreneurs - money is simply a way off keeping score off accomplishments.
a:

@ther characteristics >igh degree of commitment. 5n ,ntrepreneurFs commitment to his or her and the business it spawns determines how successful his or her company ultimately becomes. (. Tolerance for ambiguity. a: ,ntrepreneurs tend to ha-e a high tolerance for ambiguous! e-er-changing situations. ). ?lexibility. a: ,ntrepreneurs must be willing to adapt their businesses to meet changes. *. Tenacity. a: #uccessful entrepreneurs ha-e the willpower to conEuer the barriers that stand in the way of their success.
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#tudy of business owners by Yankelo-ich 2artners for 2itney 7owes Inc. identified + different entrepreneurial personalities$ %. Idealists. a: Idealists started their businesses because they had a great idea or wanted to work on something special. b: Idealists en4oy creati-e work but are impatient with performing administrati-e tasks such as financial analysis or legal matters. c: This group of entrepreneurs and their businesses are most dependent on computers. (. @ptimi=ers.
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hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness (

@ptimi=ers 9(%M of all entrepreneurs: are the second largest category. The benefits of entrepreneurship are most important to them8 they en4oy the freedom and flexibility of owning a business and would not be willing to work for someone else. c: They want their companies to grow! but their focus is on profits rather than on re-enues. d: These business owners are highly knowledgeable about financial issues and use technology to keep costs down and producti-ity up. e: They worry less than other business owners because they see themsel-es as maintaining control o-er their businesses. f: They also ha-e learned the secrets of balancing their home and business li-es. ). >ard ;orkers. a: >ard workers make up (3M of the entrepreneurial population. b: They lo-e their work and are more likely than any other group to put in extra hours to achie-e the targets. c: They tend to be detail-oriented and are the most growth-oriented entrepreneurial group. d: They are financially aggressi-e and exercise broad control o-er the details of running their businesses. e: >ard workers typically ha-e long-term business plans and stick to them. *. "ugglers. a: "ugglers also make up (3 percent of the entrepreneurial population. b: They ha-e a difficult time delegating authority and responsibility. c: They prefer to do things themsel-es to make sure e-erything meets their high standards. d: They are highly energetic people who are good at handling multiple tasks simultaneously. e: They readily embrace technology in their companies and are always looking for ways to impro-e their businesses. f: "ugglers feel pressure to maintain positi-e cash flow in their companies. +. #ustainers. a: #ustainers comprise %+ percent of all entrepreneurs b: These entrepreneurs are more likely to ha-e inherited or bought their companies. c: They are the least comfortable with technology and prefer to put in more time than to figure out how to apply technology to sol-e a particular problem. d: #ustainers are the most conser-ati-e group and do not stri-e to achie-e significant le-els of growth. e: Maintaining a good balance between business and home life is important to them.
a: b: III. 5. %. (.

7enefits and opportunities of small business ownership$ @pportunity to gain control o-er your own destiny @wning a business. Rewards of knowing you are the dri-ing forces behind their businesses.

#ection I - The hallenge of ,ntrepreneurship

@pportunity to make a difference @pportunity to do what is important to you. ,xample of "osh Nanuer. KI ha-e no smaller goal than to ha-e a positi-e impact on our planet and to create a positi-e future for my children and the world.L
7. %. (. a: . %. (. &. %.

@pportunity to reach your full potential ,scape from boring and unchallenging work. ,ntrepreneurship is a -ehicle for self-expression.

@pportunity to reap unlimited profits Money is not the primary moti-ator! but owning your own business is a great way to create wealth. (. Typical 5merican millionaire is first-generation wealthy! owns a small business and works *+-++ hours a week. ). ,xample of "ohn #chnatter. a: In %10*! #chnatter sold his car! bought used restaurant eEuipment! and began selling pi==as. 6ow! he owns (!033 stores 9most of them franchises: in *1 states and %3 foreign countries! generating sales in excess of D( billion a year. >is net worth is more than D+33 million. I6 T>, ?@@T#T,2# @? 56 ,6TR,2R,6,'RO The Inca Birl #tephanie >irsch! after graduating from college! mo-ed to Jos 5ngeles! where she tried se-eral 4obs before taking a 4ob as a fashion stylist in 6ew York. >irsch en4oyed the fashion business! but she felt stifled working for someone else8 an entrepreneurial spring was bubbling up inside her. >irsch decided to go to Jima! 2eru to -isit a friend and to celebrate the new year in #outh 5merica. @n se-eral trips to a festi-e open-air market in the city! the colorful fabrics and designs that surrounded her o-erwhelmed >irsch. #he also drew inspiration from many churches! cathedrals! and spiritual places she -isited. ;hile hiking on the Inca Trail! >irsch decided to create a business selling fashionable plastic handbags made in the rich! -ibrant colors she had seen on her trip. ;hen she returned to 6ew York! >irsch! then 4ust (*! designed a line of bags! found a manufacturer! and launched Inca Birl ,nterprises. Inca 7ags became a tremendous hit! showing up first on the arms of celebrities such as ameron &ia=! Ji- Tyler! >alle 7erry! ourtney ox! ,li=abeth >urley! indy rawford! and many others. >irsch has expanded Inca BirlFs product line to include mini skirts! sarongs! belts! beaded bathing suits! and beach mats. The company recei-ed a huge publicity boost when Sports Illustrated used Inca Birl swimsuits on some of its models in the maga=ineFs famous K#wimsuitL issue. Inca Birl suits garnered four full pages of co-erage in the popular issue.

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness *

>irsch continues to expand her business! selling her products through outlets such as >enri 7endel! #aks ?ifth 5-enue! and 7ergdorf Boodman as well as through the companyFs ;eb site. >irsch also runs her company with an eye on its social responsibility. Through her business! she supports a -ariety of charitable organi=ations! including >ale >ouse and the &oe ?und. #tephanie >irsch pro-es that age puts no limit on entrepreneurial ability. >er creati-ity and hard work ha-e enabled her to guide her company to more than D) million in sales. %. In addition to the normal obstacles of starting a business! what other barriers do young entrepreneurs face< %ns&er$ #tudentFs response may -ary. Most common answers are lack of funds! low working capital! and no knowledge of the industry. (. ;hat factors do you think contribute to a young person taking the risk of starting a business< %ns&er$ #tudentFs response may -ary. ). &oes #tephanie >irsch demonstrate the entrepreneurial personality< ,xplain. %ns&er$ #tudentFs response may -ary. Most common answers are$ Idealists! then optimi=er! and finally! >ard ;orker.

@pportunity to contribute to society and be recogni=ed for your efforts @ften small business owners are among the most trusted and respected members of their communities. (. ,ntrepreneurs en4oy the recognition they get from customers for doing a 4ob well.
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@pportunity to do what you en4oy doing Their work is not really work8 it's their a-ocation turned into a -ocation. Mike Manclark story. Mike Manclark transformed his passion for airplanes and flying into a lucrati-e business. In %10* at age %1! with borrowed D)!333! he launched Jeading ,dge 5-iation #er-ices. Jeading ,dge now generates more than D(. million in annual sales. KI donFt do this for the money!L he says. KI do it for the lo-e of airplanes.L
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2otential drawbacks of entrepreneurship$ 'ncertainty of income The regularity of income from working for someone is gone. PThe entrepreneur is the last one to be paid.P Risk of losing your entire in-ested capital )*M fail within ( years. +3M shut down within * years. .3M fold within . years. onsider the risk-reward trade-off. ;hat is the worst thing that could happen if my business fails< >ow likely is it that the worst to happen<

#ection I - The hallenge of ,ntrepreneurship

c: d: . %. (. &. %. (.

;hat can I do to lower the risk that my business will fail< ;hat is my contingency plan for coping if my business fails< Jong hours and hard work %3- to %(-hour days and six- or se-en-day workweeks with no paid -acations. @wners experience intense! draining workdays.

Jower Euality of life until the business gets established The workload can take a toll on the entrepreneurFs personal life and family. Most launch their business when they are between (+ and )*! 4ust as their families are starting. ). ?igure %.(.
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>igh le-els of stress Running your own business is highly stressful. ?ailure can mean total financial ruin. omplete responsibility ,ntrepreneurs end up taking on issues with which they are not knowledgeable. The owner is the business.

&iscouragement ReEuires much dedication! discipline! and tenacity. ,ntrepreneurs will run headlong into many obstacles! some of which may appear to be insurmountable. ). &iscouragement and disillusionment can set in.
G. 5. %. 7. %.

;hy the boom< The ?uel ?eeding The ,ntrepreneurial ?ire ,ntrepreneurs as heroes 5mericans ha-e -ery positi-e attitudes towards entrepreneurs.

,ntrepreneurial education More colleges and uni-ersities are offering courses8 more students see entrepreneurship as a career option. (. %!+33 colleges and uni-ersities offer courses to %+!333 students.
. %. &. %.

&emographic and economic factors Most start their businesses between ages (+ to **.

#hift to a ser-ice economy 7y (333! the ser-ice sector will produce 13 M of the 4obs and 03 Mof the B&2 in the '.#. (. The booming ser-ice sector has pro-ided entrepreneurs with many business opportunities.
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Technological ad-ancements

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness ,

Make it easier for entrepreneurs to start and run a business! faxes! computers! -oice mail! etc. (. ,xample of #cott 5dams. a: #cott 5dams! creator of the &ilbert cartoon strip runs his entire business from a home office with a custom-made desk and a host of high-tech gadgetry.
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Independent lifestyles ,ntrepreneurship fits the 5merican life! independence and self-sufficiency.

The ;orld ;ide ;eb 9;;: ,lectronic commerce will ha-e grown from D+%0 million in %11. and D..0 billion in (33*. (. Myriam Iaoui and ,ric Malk story a: Myriam Iaoui and ,ric Malka! co-founders of The 5rt of #ha-ing! a chain of retail stores selling sha-ing products! recently in-ested D*3!333 and eight months de-eloping a ;eb for their business which attracted new customers and generated new sales. ;eb sales now account for %+ percent of The 5rt of #ha-ingFs sales. International opportunities 1+M of the world's population li-es outside of '.#. borders. #mall businesses account for 1. percent of all exporters8 howe-er! they account for 4ust (3 percent of total exports. ). Richard 5llred story. a: Richard 5llred launched a company that produces surf-related clothing and apparel. Toes on the 6ose orporation domestic sales grew Euickly! but 5llred also saw opportunities to sell his products in foreign markets such as 5ustralia! anada! Breat 7ritain! and "apan.
>. %. (.

The ultural &i-ersity of ,ntrepreneurship Young ,ntrepreneurs Beneration H! people born between %1.+ and %103! is the most entrepreneurial generation in history. (. Members of this generation are responsible for /3 percent of all business startupsC ). Recent sur-eys ha-e found that .3 percent of %0-to (1-year-olds say they hope to launch their own businesses. *. KBeneration HL might be more appropriately called KBeneration ,.L
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;omen ,ntrepreneurs #mall business has been a leader in offering women opportunities for economic expression through employment and entrepreneurship. (. Increasing numbers of women are disco-ering that the best way to break the Pglass ceilingP that pre-ents them from rising to the top of many organi=ations is to start their own companies 9see ?igure %.):. ). ;omen are opening businesses at a rate twice that of the national a-erage
7. %.

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#ection I - The hallenge of ,ntrepreneurship

*.

;omen are launching businesses in fields that traditionally ha-e been male-

dominated. The 1.% million women-owned companies across the 'nited #tates employ (/.+ million workers! about (3 percent of all company workers in the country. .. ;omen own about )0 percent of all businesses! and these companies generate approximately D)./ trillion in sales each year.
+.

Minority ,nterprises 5sians! >ispanics! and 5frican-5mericans! respecti-ely! are most likely to become entrepreneurs. (. Jike women! minorities cite discrimination as a principal reason for their limited access to the world of entrepreneurship. ). #tudies show that the nationFs minority entrepreneurs own ).( million businesses that generate D*1+ billion in re-enues and employ nearly * million workers.
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Immigrant ,ntrepreneurs Many are lured to the '.#. by its economic freedom. ome with few assets but lots of dri-e and dreams. Marty and >elen #hih from Taiwan. Mil N-itchko and Michael Marko- story. In %11(! Mik N-itchko and Michael Marko-! migrated from Russia to the 'nited #tates! started a business based on a program they had written to help financial ad-isers e-aluate the Euality of in-estments. Today! Marko- 2rocesses International generates more than D% million in sales.
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2art-time entrepreneurs 2ermits people to try it with low-risk. %. million 5mericans are self-employed part-time. 'se it to Ptest the waters.P harles Manning! "r. story harles Manning! "r. ran a part-time business$ accident in-estigation! a skill he learned while ser-ing in the 5ir ?orce during the Norean ;ar. In %103! a full-time business! he worked on such high-profile cases as the hallenger space shuttle and Galu"et explosions and generates annual re-enues of D).. million.
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>ome-based business owners %. +)M of all businesses are home-based! but about 03 percent of them are -ery small with no employees. (. #tudy reported more than ++!333 home-based businesses generating sales of more than D% million per year. ). The biggest ad-antage is the cost sa-ings of not ha-ing to lease or buy an external location. *. They also en4oy the benefits of flexible work and lifestyles. +. #tudies suggest that the success rate for home-based businesses is high. .. &orn Nennison #tory

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness 11

a: &on Nennison launched his business! &MN 2roductions! a company that

creates )-& computer animations and sound effects for a -ariety of applications! from his kitchen table. >is first step was to create a business plan! and then he began calling on prospecti-e clients. 5lthough NennisonFs business has experienced tremendous growth! he still runs the company from his home in #imi Galley! alifornia. /. Table %.( - %0 guidelines home-based entrepreneurs should follow. Managing a #uccessful >ome-7ased 7usiness. a: &o your homework b: ?ind out what your =oning restrictions are c: hoose the most efficient location for your office d: ?ocus your home-based business idea e: &iscuss your business rules with your family f: #elect an appropriate business name g: 7uy the right eEuipment h: &ress appropriately i: Jearn to deal with distractions 4: Reali=e that your phone can be your best friend ... or your worst enemy k: 7e firm with friends and neighbors l: Take ad-antage of tax breaks m: Make sure you ha-e adeEuate insurance co-erage n: 'nderstand the special circumstances under which you can hire outside employees o: 7e prepared if your business reEuires clients to come to your home p: Bet a post office box E: 6etwork! network! network r: 7e proud of your home-based business ?amily business owners @f the (+.+ million businesses in the 'nited #tates! 13M are family-owned and managed. (. These companies account for .3 M of total employment in the 'nited #tates and generate more than +3M of the '.#. Bross &omestic 2roduct 9B&2:. ). )/M of the Fortune 500 companies are family businesses. *. @nly ))M of family businesses sur-i-e to the second generation8 4ust %(M make it to the third generation8 and only )M sur-i-e to the fourth generation and beyond.
B. %. >.

a: b: c: d:

opreneurs. %. ,ntrepreneurial couples who work together as co-owners of their businesses. (. ompanies co-owned by spouses represent one of the fastest growing business sectors. ). #ome of the characteristics they rely on include$ personalities that mesh. mutual respect. compatible goals. eEual partnership.

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#ection I - The hallenge of ,ntrepreneurship

e: f: g: h: i: 4: k: l: I. %.

complementary business skills. open communication. clear di-ision of roles and authority. ability to encourage each other. separate work spaces. boundaries between work and personal life. a sense of humor. may not work with e-ery couple.

orporate castoffs 5s ma4or '.#. companies ha-e Ptrimmed their ranks!P many of these displaced workers ha-e launched their own companies. (. (3M of these managers start their own companies. ). 5n entrepreneurial offense is the best defense to corporate layoffs. orporate dropouts &ownsi=ing has diminished employee loyalties. Many are striking out on their own for more opportunity! better income! and more K4ob security.L
". %. (. GII. The ontributions of #mall 7usiness 5. Introduction %. (+.+ million businesses! 10.+M of all businesses in the '.#. would Eualify as

small businesses. (. #mall business employs more than +(M of the pri-ate sector work force. ). Girtually all 4ob growth in %113s came from small business! creating /+.0M of new 4obs. *. #mall companies bear the hea-iest load of training new workers. +. #mall businesses produce +%M of the B&2 and */M of business sales. .. They also generate (3M more inno-ations per employee than large companies. /. #ee ?igure %./. I6 T>, ?@@T#T,2# @? 56 ,6TR,2R,6,'RO MonopolyFs In-entor ,ntrepreneurs ha-e exhibited persistence! determination! and courage in the face of ad-ersity. onsider the following entrepreneurFs story. In %1)*! 5mericans were suffering from the de-astating effects of the Breat &epression! which had caused so many businesses to fail and the unemployment rate to peak at (+ percent. harles &arrow of Bermantown! 2ennsyl-ania had lost his 4ob as a heating eEuipment salesman in %1)3 and had worked at odd 4obs to support his family. &uring this down time! he reali=ed that people in the 'nited #tates needed a di-ersion from the worries of e-eryday li-ing. >e de-eloped a board game that allowed players to wheel and deal like the real millionaires of the period. &arrow called the game KMonopolyL and! unable to finance its production and marketing on his

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness 1$

own! he took it to 2arker 7rothers! one of the nationFs oldest and best-known game makers. 2arker 7rothers re-iewed the game but re4ected it. &arrow managed to borrow a small amount of money and with the help of a friend who was a printer! constructed a few hand-made game sets! which he peddled from store to store. ;anamakerFs &epartment #tore in 2hiladelphia placed a consignment order for +!333 games. They sold Euickly! and Monopoly was soon the rage among residents of the city. The popularity of the game caused 2arker 7rothers to reconsider its decision! and in %1)+! the company purchased from &arrow the rights to the game. &emand for the game was so strong that 2arker 7rothers could not manufacture enough games sets to meet it e-en though the company was turning out (3!333 sets a week. To date! more than (33 million Monopoly sets ha-e been sold worldwide! making it one of the most popular games e-er created. The game has been printed in (. different languages. harles &arrow ne-er in-ented another game! but his legacy li-es on through the game that more than +33 million people ha-e played. &arrow became a millionaire from the royalties he recei-ed on the sales of Monopoly. %. ,xplain how harles &arrow exhibits the Pentrepreneurial spirit.P %ns&er: #tudentFs answer may -ary. #ome common Kentrepreneurial spiritL could be$ commitment! persistent! and belie-ing himself and his product. (. Is &arrowFs story of continuing to try in the face of failure typical of successful entrepreneurs< ,xplain. %ns&er: #tudentFs answer may -ary. 5 common explanation is$ wanting to make a difference.
GIII. The Ten &eadly Mistakes of ,ntrepreneurship 5. #mall businesses ha-e a much higher failure rate than larger businesses. %. .3M will fail in six years. (. auses of small business failure a: limited resources! inexperienced management! and lack of financial

stability. Managerial incompetence. Management inexperience or poor decision making ability is the chief problem of the failing enterprise. (. The owner-leader lacks the knowledge or ability needed. ). 5ndrew Nay story. a: 5ndrew Nay was a pioneer in the earliest days of the portable computer with his Naypro model. 'nfortunately! he had no experience in running a high-tech startup! and! despite the popularity of his computer! Nay made a series of managerial blunders that ultimately forced the company into bankruptcy.
7. %. .

'ndercapitali=ation. %. 5ny successful business -enture reEuires proper financial control. (. Two pitfalls affecting small business's financial health are common$ undercapitali=ation and poor cash management.

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#ection I - The hallenge of ,ntrepreneurship

). ,ntrepreneurs tend to be o-erly optimistic and often underestimate the financial

reEuirements of launching a business or the amount of time reEuired for the company to become self-sustaining.
&. 2oor ash Management. %. Insufficient cash flow due to poor cash management is a common cause of

business failure.
(. Maintaining adeEuate cash flow to pay bills in a timely fashion is a constant

challenge for small companies.

). 2oor credit and collection practices on accounts recei-able! sloppy accounts

payable practices that exert undue pressure on a companyFs cash balance! and uncontrolled spending are common to many small business bankruptcies. *. 7oo.com story. a: The founders of 7oo.com! a highly publici=ed Internet clothing retailer! failed to establish adeEuate financial controls in the business! and it ultimately caused the company to run out of cash and fold. 5lthough the companyFs sales reached D%.% million per month! its expenses were running ten times that amountC The companyFs cash drained away! and by the time the company went into bankruptcy.
,. Jack of #trategic Management. %. Too many small business managers neglect the process of strategic management. (. ?ailure to plan! howe-er! usually results in failure to sur-i-e. ). learly defined strategy is necessary for creating and maintaining a competiti-e

edge.
*. 7uilding a strategic plan forces an entrepreneur to assess realistically the

proposed business's potential.

?. ;eak Marketing ,ffort. %. #ometimes entrepreneurs belie-e that if they Kbuild it!L customers automatically

Kwill come.L
(. #tephen Mason and 5lan &a-is story. a: #tephen Mason and 5lan &a-is are cofounders of

atamount 7rewery! one of 6ew ,nglandFs first microbreweries. ,arly on! customers! intrigued by the romance and mystiEue of microbreweries! flocked to atamountFs uniEue beers. ;ithin six years! atamountFs production had climbed from )!+33 barrels a year to %(!333 barrels a year. 'nfortunately! its marketing efforts did not keep pace. #ales slipped as customers drifted away! and the company could not generate enough cash to repay the debt it took on to expand its plant! forcing it into bankruptcy.

B. %. (. ). *.

'ncontrolled growth. They will outgrow their capital base with e-ery *3 to +3M increase in sales. Ideally the business should expand on retained earnings. Browth also reEuires structural and other changes. The most important change occurs in managerial expertise.

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness 1(

>. %. (. a: ). a: b: I.

2oor location. Jocation is part art and part science. @wners need to in-estigate before they locate. It's critical in retail. Neys to location. ;hat it costs. ;hat it generates in sales -olume. Jack of In-entory ontrol %. In-entory control is one of the most neglected areas in small business. (. Insufficient in-entory le-els result in shortages and stockouts causing customers to become disillusioned and not return. ). >as too much in-entory or has too much of the wrong type of in-entory.
". Inability to Make the K,ntrepreneurial Transition.L %. Many businesses fail when their founders are unable to make the transition from

entrepreneur to manager and are unwilling to bring in a professional management team. (. Browth reEuires entrepreneurs to delegate authority. ). They should a-oid micromanaging. *. "oe Nraus story. a: "oe Nraus launched the Internet portal ,xcite 9now ,xcite at >ome: and became ,xciteFs first chief executi-e officer. 5fter the company grew! he and his co founders decided that ,xcite needed experienced! professional management to guide its rapid growth. >iring an experienced manger pro-ed to be a wise mo-e for ,xcite and for Nraus.
IH. 2utting ?ailure into 2erspecti-e %. It is a natural part of the process. The only way to not fail is to not do

anything. Jearn from failures and be more successful the next time. It's not mistake a-oidance but learning from mistakes that counts. ). ,ntrepreneurship reEuires persistence and resilience.
(.

I6 T>, ?@@T#T,2# @? 56 ,6TR,2R,6,'RO Tea Time #eth Boldman and his classmates discussed a case on the be-erage industry. @ne of the topics in professor 7arry 6alebuffFs class that day was which products were missing in the crowded be-erage market. KThere were too many sweet drinks and too many bland drinks!L recalls Boldman. 5fter class! professor 6alebuff and Boldman spent time discussing the types of drinks that might find a profitable niche in the industry.

1)

#ection I - The hallenge of ,ntrepreneurship

5 few years later! Boldman e-mailed 6alebuff! asking if he would be interested in discussing the possibility of building a company that would market a drink aimed at filling this niche in the be-erage market. 6alebuff had 4ust returned from a trip to India! where he had researched material for a case study on the tea industry. Boldman! who had spent time teaching in Russia and hina! two cultures in which tea plays an important role! had learned a great deal about tea in his tra-els. >e knew that tea was the second most popular drink in the world behind water. 6alebuff came up with the perfect name for the company! >onest Tea. The partners selected fi-e teas for their initial product line and financed the company with D(+3!333 of their own money and another D(+/!333 from family and friends. Boldman! who is the companyFs KTea,@!L and 6alebuff ha-e since raised an additional D(./ million in capital. &istribution and marketing and distribution continue to present challenges to the small company! howe-er. >onest Tea focuses on selling its teas through health food stores! gourmet food shops! and restaurants! although some supermarket chains. The companyFs marketing efforts ha-e been modest! but Boldman and 6alebuff ha-e relied on a strong public relations effort to generate publicity for their small business. @ffering free samples! a common marketing ploy for many small companies! has pro-ed to be successful! but building name recognition that way can be extremely slow. 5lthough some be-erage industry obser-ers wonder if >onest Tea can build enough market share to become a -iable company in the long run! Boldman and 6alebuff are optimistic. K;e saw an opportunity that the bigger companies did not see!L says Boldman. 2lus! we ha-e been a nimble company that can ad4ust to our customersF needs.L ;hatFs next for >onest Tea< K;e want to be a national brand!L explains Boldman. %. &escribe the opportunities and the threats facing >onest Tea. %ns&er: #tudentFs answer will -ary. (. @n a scale of % to %3! how would you rank >onest TeaFs long-term chances of success< ;ould you be willing to in-est in the company< ,xplain. %ns&er: #tudentFs answer will -ary. ). ;hat ad-antages do >onest TeaFs larger competitors ha-e o-er the small company< ;hat ad-antages does >onest Tea ha-e o-er its larger ri-als< >ow can the company exploit those ad-antages< %ns&er: #tudentFs answer will -ary.
H. >ow to a-oid the pitfalls. 5. Nnow your business in depth %. Bet the best education and experience before you start. (. ,xample of #tephanie 5nn.

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness 1*

7. %. (. ). . %. (. ). *. &. %.

2repare 5 7usiness 2lan. 2lanning replaces PI thinkP with PI know.P Most entrepreneurs don't ha-e a solid plan. ,ntrepreneurs attempt to build businesses on faulty assumptions. Manage ?inancial Resources. &e-elop a practical information system and use it to make decisions. To ha-e adeEuate startup capital. ,stimate capital needed then double it. ash is your most -aluable resource. 'nderstand ?inancial #tatements. These documents are reliable indicators of the small business's health. Nnow Nnow the financial danger signs to look for. Jearn To Manage 2eople ,ffecti-ely. Your hires will determine where your company will go. #hare information.

them.
(. ,. %. (. ?. %. (. ).

#et your business apart from the competition &ifferentiate your company and products. on-ince your customers that you are different from competitors. ?or small companies! that basis often is customer ser-ice! con-enience! speed! Euality! or whate-er else is important to attracting and keeping happy customers.
B. %. (. ). *.

Neep in tune with yourself. ReEuires lots of energy and enthusiasm. Manage yourself. Neep a positi-e attitude. Neep your passion.

Chapter Summar/ %. &efine the role of the entrepreneur in business--in the 'nited #tates and across the globe. Record numbers of people ha-e launched companies o-er the past decade. The boom in entrepreneurship is not limited solely to the 'nited #tates8 many nations across the globe are seeing similar growth in the small business sector. 5 -ariety of competiti-e! economic! and demographic shifts ha-e created a world in which Psmall is beautiful.P #ociety depends on entrepreneurs to pro-ide the dri-e and risk-taking necessary for the business system to supply people with the goods and ser-ices they need. (. &escribe the entrepreneurial profile.

1+

#ection I - The hallenge of ,ntrepreneurship

,ntrepreneurs ha-e some common characteristics! including a desire for responsibility! a preference for moderate risk! confidence in their ability to succeed! a desire for immediate feedback! a high energy le-el! a future orientation! skill at organi=ing! and a -alue of achie-ement o-er money. In a phrase! they are high achie-ers. ). &escribe the benefits and opportunities of owning a small business. &ri-en by these personal characteristics! entrepreneurs establish and manage small businesses to gain control o-er their li-es! become self-fulfilled! reap unlimited profits! contribute to society! and do what they en4oy doing. &escribe the potential drawbacks of owning a small business. #mall business ownership has some potential drawbacks. There are no guarantees that the business will make a profit or e-en sur-i-e. The time and energy reEuired to manage a new business may ha-e dire effects on the owner and family members. ,xplain the forces that are dri-ing the growth in entrepreneurship. #e-eral factors are dri-ing the boom in entrepreneurship! including the portrayal of entrepreneurs as heroes! better entrepreneurial education! economic and demographic factors! a shift to a ser-ice economy! technological ad-ancements! more-independent lifestyles! and increased international opportunities. &iscuss the role of di-ersity in small business and entrepreneurship. #e-eral groups are leading the nation's dri-e toward entrepreneurship$ women! minorities! immigrants! Ppart-timers!P home-based business owners! family business owners! copreneurs! corporate castoffs! and corporate dropouts. &escribe the contributions small businesses make to the '.#. economy. The small business sector's contributions are many. They make up 11 percent of all businesses! employ +) percent of the pri-ate sector workforce! create /+.0M of the new 4obs in the economy! produce +% percent of the country's pri-ate Bross &omestic 2roduct 9B&2:! and account for */ percent of business sales. 0. ,xplain the reasons small businesses fail. The failure rate for small businesses is higher than for big businesses! and profits fluctuate with general economic conditions. #75 statistics show that .3 percent of new businesses will ha-e failed within six years. The primary cause of business failure is incompetent management. @ther reasons include poor financial control! failure to plan! inappropriate location! lack of in-entory control! improper managerial attitudes! and inability to make the Pentrepreneurial transition.P 1. 2ut business failure into the proper perspecti-e. 7ecause they are building businesses in an en-ironment filled with uncertainty and shaped by rapid change! entrepreneurs recogni=e that failure is likely to be a part

*.

+.

..

/.

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness 1,

of their li-es8 yet! they are not paraly=ed by that fear. #uccessful entrepreneurs ha-e the attitude that failures are simply stepping stones along the path to success. %3. ,xplain how small business owners can a-oid the ma4or pitfalls of running a business. There are se-eral general tactics the small business owner can employ to a-oid failure. The entrepreneur should know the business in depth! de-elop a solid business plan! manage financial resources effecti-ely! understand financial statements! learn to manage people effecti-ely! set the business apart from the competition! and keep in tune with yourself. Discussion 0uestions %. ;hat forces ha-e led to the boom in entrepreneurship in the 'nited #tates< %ns&er - orporate downsi=ing flooding the market with corporate cast-offs! an attitude that small is beautiful! international economic de-elopment due to the fall of communism and the Kcapitali=ationL of former state-owned industries! a dream of freedom and independence! perse-erance in achie-ing results! and the opportunities presented by an e-er-changing en-ironment. (. ;hat is an entrepreneur< Bi-e a brief description of the entrepreneurial profile. %ns&er - @ne who creates a new business in the face of risk and uncertainty for the purpose of achie-ing profit and growth by identifying opportunities and assembling the necessary resources to capitali=e on them. 2rofile - a: desire for responsibility! b: preference for moderate risk! c: confidence in personal success! d: desire for immediate feedback! e: high le-el of energy! f: possess a future orientation! g: skill in organi=ation! h: money is a great way to keep score but it is not as important as achie-ement. 3. Inc. maga=ine claims! K,ntrepreneurship is more mundane than itFs sometimes portrayed . . . you donFt need to be a person of mythical proportions to be -ery! -ery successful in building a company.L &o you agree< ,xplain. %ns&er - will -ary according to the student. *. ;hat are the ma4or benefits of business ownership< %ns&er - a: opportunity to gain control o-er your destiny! b: opportunity to make a difference! c: opportunity to reach your full potential! d: opportunity to reap unlimited profits! e: opportunity to make a contribution to society and recei-e recognition for your efforts. +. ;hich of the potential drawbacks to business ownership are most critical< %ns&er - #tudent's responses will -ary but should co-er the following drawbacks$ a: uncertainty of income! b: risk of losing in-ested capital! c: long hours and hard work! d: lower Euality of life until the business gets established! d: complete responsibility. .. 7riefly describe the role of the following groups in entrepreneurship$ women! minorities! immigrants! Kpart-timers!L home-based business owners! family business owners! copreneurs! corporate castoffs! and corporate dropouts. %ns&er -

#-

#ection I - The hallenge of ,ntrepreneurship

/. ;hat contributions do small businesses make to our economy< %ns&er - There is no set definition of a small business. #75 criteria -ary by industry! see page ).. 10M of '.#. businesses could be considered small. TheyF-e contributed almost all of the recent 4ob growth! employ o-er +3M of the pri-ate workforce! and contribute *0M of our B62 and *(M of all business sales. 0. &escribe the small business failure rate. %ns&er - The failure rate for small businesses is higher than for big businesses. 7ased on data released from #75! .3 percent of new businesses fail within six years. The primary reason is incompetent management. @ther reasons are poor financial control! failure to plan! inappropriate location! lack of in-entory control! improper managerial attitudes! and inability to make the Pentrepreneurial transition.P 1. @utline the causes of business failure. ;hich problems cause most business failures< %ns&er - Management incompetence - This one causes the most problems. The manager lacks the capacity to operate a small business successfully. Jack of experience - Many owners who start businesses in fields in which they ha-e no prior experience fail. #ome owners lack the right kind of experience. 2oor financial control - 'ndercapitali=ation #tarting the business on a PshoestringP--often leads to failure. Jack of strategic planning Too many owners neglect it because they think it only benefits large companies. 'ncontrolled growth - Browth is natural and healthy! but unplanned growth can be fatal to the business. Inappropriate location - @wners who choose a business location without proper analysis! in-estigation! and planning often fail. Too often! owners seek PcheapP sites and locate themsel-es straight into failure. Jack of in-entory control - 5lthough in-entory is typically the largest in-estment for the owner! in-entory control is one of the most neglected duties. The result is loss through crime and pressure on cash flows from handling the wrong items. Inability to make the Kentrepreneurial transitionL - >a-ing started the business! some entrepreneurs lack the ability to manage it when it gets larger and fail to turn it o-er to a different management team. %3. >ow can the small business owner a-oid the common pitfalls that often lead to business failure< %ns&er - &oing the following will help to a-oid pitfalls. a: know the business in depth! b: prepare a business plan! c: manage financial resources! d: understand financial statements and know how to use them! e: learn to manage people effecti-ely! f: keep in tune with yourself. %%. ;hy is it important to study the small business failure rate< %ns&er - It pro-ides a realistic picture for potential entrepreneurs to consider prior to their launching of their businesses. It pro-ides understanding of why businesses fail and offers insight into ways to pre-ent it. %(. ,xplain the typical entrepreneur's attitude toward failure.

hapter % - ,ntrepreneurs$ The &ri-ing ?orce 7ehind #mall 7usiness #1

%ns&er - >eQshe learn from the mistakes and tries again. >eQshe takes moderate! considered risks! has a positi-e upbeat attitude! and doesn't a-oid failure8 heQshe learn from it. %). @ne entrepreneur says that too many people Pdon't see that by spending their li-es afraid of failure! they become failures. 7ut when you go out there and risk as I ha-e! you'll ha-e failures along the way! but e-entually the result is great success if you are willing to keep risking. ?or e-ery big yes in life! there will be %11 nos.P &o you agree< ,xplain. %ns&er - #tudents' responses will -ary. %*. ;hat ad-ice would you offer an entrepreneurial friend who has 4ust suffered a business failure< %ns&er - #tudents' responses will -ary but the ad-ice should include a reality check! long hours! high failure rate! and a dose of the positi-e! persist! learn! don't gi-e up. %+. 6oting the growing trend among collegiate entrepreneurs launching businesses while still in school! one educator says! K5 student whose main acti-ity on campus is running a business is missing the basic reason for being here! which is to get an education.L &o you agree< ,xplain. #tudentFs responses will -ary. Step into the 1eal 2orld %. hoose an entrepreneur in your community and inter-iew him or her. ;hat's the PstoryP behind the business< ;hat ad-antages and disad-antages does the owner see in owning a business< ;hat ad-ice would he or she offer to someone considering launching a business< 2. #earch through recent business publications 9especially those focusing on small companies such as Inc., Entrepreneur, Business Start-Ups, Nation's Business! or Your Co pany: and find an example of an entrepreneur--past or present--who exhibits the entrepreneurial spirit of stri-ing for success in the face of failure as Bail 7orden did. 2repare a brief report for your class. ). #elect one of the categories under the section PThe &i-ersity of ,ntrepreneurshipP in this chapter and research it in more detail. ?ind examples of the entrepreneurial profile. 2repare a brief report for your class. *. Inter-iew a local banker who has experience lending to small companies. ;hat factors does he or she belie-e are important to a small company's success< ;hat factors has he or she seen to cause business failures< ;hat does the lender want to see in a business start-up before agreeing to lend any money<