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entrepreneurship
a process perspective
2e
Robert A. Baron
Wellington Professor of Management,
Lally School of Management & Technology,
Rensselaer Polytechnic Institute,
Troy, NY
Scott A. Shane
Professor of Economics and Entrepreneurship,
Weatherhead School of Management,
Case Western Reserve University,
Cleveland, OH
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Entrepreneurship: A Process Perspective, 2nd Edition

Robert A. Baron and Scott A. Shane
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chapter 1
Entrepreneurship: A Field,
an Activity, and a Way
of Life
learning objectives
After reading this chapter, you should be able to:
1 Define entrepreneurship as a field of business.
2 Explain why the activities of entrepreneurs are so

important to the economies of their countries, and
why entrepreneurship is an increasingly popular
career choice.
3 Describe the process perspective of entrepre-

neurship, and list the major phases of this process.
4 Explain why entrepreneurship can be viewed as

arising out of the intersection of enterprising people
and opportunities.
5 Understand why this text will both describe what

entrepreneurs actually do and what, perhaps, they
should do!
6 Describe several issues and questions about entre-

preneurship that are currently receiving greater
attention in the field (e.g., university-based
technology transfer).
7 Explain why certain sources of knowledge about

entrepreneurship are more reliable and useful than
others.
8 Describe the nature of three basic means for obtaining

knowledge about entrepreneurship—systematic
observation, the case method, and experimentation—
and the role of theory in the field of entrepreneurship.
CHAPTER 1 Entrepreneurship: A Field, an Activity, and a Way of Life 3
Anyone who has invented a better mousetrap, or the contemporary equivalent,

can expect to be harassed by strangers demanding that you read their unpublished
manuscripts or undergo the humiliation of public speaking, usually on remote
college campuses.
—Barbara Ehrenreich (1985)
If you have ever been an entrepreneur—or plan to liked. One solution is to carry around heavy bottles
become one in the future—you will certainly come to containing preferred drinks. But Ms. Malmer didn’t like
appreciate the accuracy of these words. One of us has doing that, so she and her friend Paul Staunton came up
been an entrepreneur (Baron) and the other has worked with another idea: why not produce flavorings in small
closely with them for many years (Shane), so we know containers that people can easily carry with them and add
that many people seem to believe that entrepreneurs to any beverage to get the taste they like? The company
have extraordinary powers—abilities that are almost they started to produce this and similar products—
magical in nature. This belief, in turn reflects the widely Flavor2Go—is now riding a wave of sharply rising sales.
held view that entrepreneurs are unusual people. Think
about it for a moment. When we say the word ‘‘entre-
preneur,’’ what names come to mind? Bill Gates? Figure 1 . 1 From Small Inventions, Profitable Companies
Sometimes Grow
Michael Dell? Julie Aigner-Clark (founder of ‘‘Baby
New products don’t have to be dramatic to succeed. The
Einstein’’)? Jeff Bezos (founder of Amazon.com)? Prob- TissueKup, created by Lorraine Santoli, is a good illustration of
ably, because the fame of these entrepreneurs has this fact. The device, which fits into the cup holders found in
spread around the globe. But in fact, entrepreneurship, almost all vehicles, is useful to many drivers, and has found a
large and ready market.
as we’ll describe it in this book, is definitely not restricted
to this kind of awe-inspiring success in one of a handful
of industries. On the contrary, the entrepreneurial spirit
can be observed in much smaller companies and in an
almost endless array of contexts. For instance, consider
Lorraine Santoli. Growing tired of trying to find a facial
tissue while driving, she came up with a new idea—a cup
that holds and dispenses tissues one at a time and that
can fit in the cup holders found in almost every vehicle
(see Figure 1.1). The company she founded to develop
this idea—TissueKups Inc.—is now humming along with
sales in the millions. High tech? No. ‘‘Sexy’’? No.
Effective and appealing to many potential customers?
Something new that did not exist before? Yes!
Or, for another example, consider Victoria Malmer
who, like many millions of people in the United States and
Courtesy, TissueKups
other countries, wanted to drink more liquids because

doing so is good for personal health. Moreover, like many
people, she wanted her beverages to have a flavor she
Why do we start with these examples of what might be termed non-earth-

shaking products? Because they illustrate several key points about entrepreneur-
ship that we will make throughout this text. First, these entrepreneurs and
their companies indicate that entrepreneurship is definitely a process—a chain
of events and activities that takes place over time—sometimes, considerable
periods of time. It begins with an idea for something new—often, a new
product or service. But the idea is only the start: Unless the process continues
4 PART 1 Entrepreneurship: Who, What, Why?
so that the idea is converted into reality (actually brought to market through a
new business venture, licensing to existing companies, etc.), it is not
entrepreneurship. Rather, it is just an exercise in creativity or idea generation.
Second, these examples underscore the fact that being an entrepreneur does
not necessarily involve starting a particular kind of company, working in a
particular industry or sector (e.g., high-tech), or coming up with a dramatic
new product. On the contrary, as we’ll see over and over again, the heart of the
process involves bringing something new—something that is not now being
produced or exploited by others—to the marketplace. We’ll have more to say
about this, the heart of entrepreneurship, later; here, we simply want to break the
mind-set with which many people enter their first course in entrepreneurship—
an approach reflecting several major myths about entrepreneurship (e.g., it can’t
occur without large amounts of capital, it must be based on new technology, must
tap a really ‘‘hot’’ market, and so on). We’ll be discussing—and refuting—these
and other false ideas throughout this book, so stay tuned for more about this
point because our goal is to present an accurate picture of what entrepreneurship
really is, rather than a repetition of what many people think it is.
Having clarified these important points, we now turn to several tasks that
we want to accomplish in this initial chapter. First, we present a definition of
entrepreneurship as an activity, a field of study in business, and a way of life.
Next, we’ll offer a framework for understanding entrepreneurship as a process—
one that unfolds over time. As we’ll soon see, this process is affected by many
different factors, some relating to individuals (i.e., entrepreneurs), some to their
relations with other people (e.g., partners, customers, venture capitalists), and
some to society as a whole (e.g., government regulations, market conditions). A
major theme of this book will be that all three kinds of factors (individual,
group, societal) play an important role in every phase of the entrepreneurial
process. As part of this discussion, we emphasize yet another key theme: At the
heart of the entrepreneurial process lies the intersection of opportunities
generated by changing economic, technological, and social conditions, as well as
enterprising people capable of recognizing and actively exploiting them. This
theme will be examined in more detail in Chapter 2, which focuses on the
emergence of opportunities, and Chapter 3, which focuses on the cognitive
foundations of entrepreneurship (e.g., where ideas for new products or services
originate and how individuals actually perceive or recognize opportunities).
Third, we’ll comment briefly on current trends in the field of entrepreneur-
ship—topics and questions that are receiving growing attention because they
are increasingly recognized as playing an important role in the entrepreneurial
process.
After that, we consider the question of how we know what we currently
know about entrepreneurship—in other words, how the information presented in
this book was obtained. We think this point is important because, in general, it is
dangerous to accept any information as accurate without knowing something
about its source and how it was obtained. Finally, we provide you with an
overview of the contents of this book and a description of its special features.
Now, to begin at the beginning, we offer a definition of entrepreneurship—a
definition that will be reflected in the contents of every chapter.
The Field of Entrepreneurship:

learning
objective 1
Define entrepreneurship as
Its Nature and Roots
Definitions are always tricky, and for a field as new as entrepreneurship, the task
a field of business. is even more complex. It is not surprising, then, that currently, there is no single
agreed-upon definition of entrepreneurship either as a field of study in business
or as an activity in which people engage. Having said that, we should note that
a definition offered by Shane and Venkataraman1 has received increasing accep-

tance. Broadly paraphrased, their definition suggests the following:
Entrepreneurship, as a field of business, seeks to understand how
opportunities to create something new (e.g., new products or services, new
markets, new production processes or raw materials, new ways of organizing
existing technologies) arise and are discovered or created by specific
individuals, who then use various means to exploit or develop them, thus
producing a wide range of effects.
By implication, this definition suggests that entrepreneurship, as an activity
carried out by specific individuals, involves the key actions we mentioned
earlier (identifying an opportunity that is potentially valuable in the sense that
it can be exploited in practical business terms and yield sustainable profits),
and the activities involved in actually exploiting or developing this opportu-
nity. In addition, as we note in a later section of this chapter, the process does
not end with the launching of a new venture; it also involves being able to run a
new business successfully after it comes into existence.
We believe that this definition is a clear and useful one, and does indeed
capture the essential nature of entrepreneurship. Although it helps to clarify
many important questions, perhaps the most central of these is: ‘‘Just what
makes someone an entrepreneur?’’ To see how the definition offered by Shane
and Venkataraman helps significantly in this respect, consider the following
individuals. For each, ask yourself the following question: ‘‘Is this person an
entrepreneur?’’
n A woman who enjoys making appetizers for parties in her home, and who
is often praised by her friends who tell her how delicious these are, starts a
company to make and sell them.
n A university scientist engaged in basic research on the biochemistry of life,
makes important discoveries that advance the frontiers of his field;
however, he has no interest in identifying practical uses of his discoveries
and does not attempt to do so.
n After being ‘‘downsized’’ from his management level job, a middle-aged
man discovers a special way of processing old tires to make edging for
gardens (borders that keep different kinds of plants separate).
n A retired army officer purchases obsolete amphibious vehicles from the
government and uses them to start a company that specializes in tours of
remote wilderness areas.
n A man who has often forgotten the numbers needed to open combination
locks comes up with a new idea: why not build a lock that uses letters
instead of numbers? He enters the idea (which he previously patented) in a
contest for new inventions, and wins. The retailer that runs the contest signs
a contract with him to sell this new kind of lock at all of its 1,200 stores.
Which of these individuals are entrepreneurs? At first glance, you might be
tempted to conclude that only the last two are really entrepreneurs—only they
brought something new to market. We suggest, however, that all of these
individuals with the exception of the university scientist are entrepreneurs.
Why? Recall our definition: Entrepreneurship involves recognizing an oppor-
tunity to create something new. It does not have to be a new product or service;
on the contrary, it can involve recognizing an opportunity to develop a new
market, to use a new raw material, or to develop a new means of production, to
mention just a few possibilities. According to this definition, the appetizer-
baking woman is acting as an entrepreneur because she recognized a new
market—one that will pay a premium price for appetizers that taste truly
homemade. In fact, this is just what Nancy Mueller did when she started Nancy’s
Quiche—a company she recently sold for several hundred million dollars.
Similarly, the downsized executive is using an existing ‘‘raw material’’—

old tires—in a new way. This activity, too, qualifies as entrepreneurship. The
retired Army officer and the inventor are also entrepreneurs: Both identified
opportunities for new products or services, and both took active steps to
exploit these ideas in ways that generate economic gains.
In contrast, the university scientist is not an entrepreneur according to our
definition. Even though his research does add appreciably to human
knowledge, the fact that he makes no effort to apply his discoveries to the
development of new products, services, markets, or means of production,
suggests that he not an entrepreneur. Certainly, he is playing a valuable role in
society; but no, he is not an entrepreneur.
In fact, scientists often can be entrepreneurs. For instance, one of us
(Baron) is privileged to teach, from time to time, with a Nobel-prize winning
physicist, Ivar Giaever. Prof. Giaever used his scientific knowledge to develop
a new product—one that can help physicians identify cancer cells not by
looking at them through a microscope (what they typically do), but in terms of
the electrical activity of the cells. Professor Giaever found that cancer cells and
normal cells differ in this respect, and his product—which he patented—may
well soon become a commercial as well as a scientific device. Whether it does
or not, the fact that he has attempted to bring this new product to market
makes him an entrepreneur as well as a world-class scientist.
In essence, then, entrepreneurship requires creating or recognizing a
commercial application for something new. The new commercial application
can take many different forms, but simply inventing a new technology,
product, or service, or generating a new idea is not, in itself, enough. As shown
in Figure 1.2, many inventions never result in actual products for the simple
reason that they offer no commercial benefits (or, alternatively, no one can
think of a marketable use for them), and so they cannot really serve as the basis
for a profitable new business. In sum, we agree with Shane and Venkataraman
Figure 1 . 2
Newness Is Not Enough!
As shown here, the fact that a
product is new is not sufficient to
assure that it will be developed
and brought to market. We doubt,
for instance, that the product
shown here will ever really exist
outside the cartoonists’
imagination.
Source: Universal Press Syndicate, September 4, 2001.
and with other theorists2 that entrepreneurship emerges out of the intersection
of what might be termed inspiration and activation—recognizing opportunities
for something new that people will want to own or use, and taking vigorous
steps to convert these opportunities into viable, profitable businesses.
A Recent Extension and Clarification

The definition offered by Shane and Venkataraman appears to be a useful one
and has gained widespread acceptance in the field of entrepreneurship.
However, we should note that it has recently been extended and clarified by
McMullen and Shepherd, two well-known researchers.3 They note that in
essence, entrepreneurship involves two key phases or activities. In the first,
individuals (potential entrepreneurs) use their existing knowledge and
personal strategies for obtaining knowledge, to recognize that some oppor-
tunity exists—an opportunity that someone, not necessarily they, can develop.
In the second phase, they evaluate this opportunity to determine whether they
have the knowledge and skills needed to actually develop it. In other words,
they try to determine whether the opportunity is one they can pursue by
taking such actions as founding a new venture. In essence, this framework is
fully consistent with the definition offered earlier, but it also helps to highlight
the importance of individual motivation, skills, and knowledge in entrepre-
neurial action, and the additional point—a very important one we’ll make
again in Chapter 3—that recognizing an opportunity can be quite distinct from
actually doing something about it.
Other additions to the framework have been offered as well. One of the
most interesting, suggested by Sarasvathy,4 proposes that we should focus not
so much on who, why, and how specific persons identify particular
opportunities, but rather on the barriers that prevent some persons from
becoming entrepreneurs, and on how entrepreneurs create specific kinds of
firms because these new businesses are the ‘‘tool’’ through which entrepre-
neurs convert their ideas and skills into means of exploiting various
opportunities. When added to the definition proposed by Shane and
Venkataraman, these more recent suggestions truly enrich our basic under-
standing of the process of entrepreneurship and how it unfolds.
A Note on Intrapreneurship
Before turning to other topics, we should note, briefly, that recognizing
opportunities for creating or developing something new can occur within
existing organizations as well as outside them.5 In fact, many successful
companies are deeply concerned with encouraging innovations and take active
steps to provide an environment in which it can flourish.6 These companies
work to develop a corporate culture that is receptive to new ideas rather than
one that routinely rejects them, and provide concrete rewards for innovation.7
For instance, General Electric offers employees who come up with innovative
ideas a share of the profits resulting from them. Although we can’t say for
certain that this policy increased innovation at GE, the company obtained more
patents during recent decades than any other U.S. company; in fact, it holds
more 51,000 in total! Individuals who act like entrepreneurs inside a company
are often described as being intrapreneurs—people who create something new,
but inside an existing company rather than through the route of founding a
new venture. Unfortunately, they often face formidable barriers or obstacles,
because not all organizations are as committed to innovation as General
Electric. However, innovation is truly essential for gaining and sustaining
competitive advantage, so it is something all organizations should seek.8
Although our focus will be firmly on entrepreneurs throughout this book, we
do want to note that individuals can act entrepreneurially in several different
contexts, including large, existing companies.
Entrepreneurship: An Engine of Economic Growth

learning
objective 2
Explain why the activities of
When one of us (Robert Baron) began his career as a university professor (in
1968), courses such as this one simply did not exist. Now, in contrast, courses
on entrepreneurship are offered by virtually every school of management or
entrepreneurs are so important business and show a pattern of rapidly growing enrollments in recent years.
to the economies of their Why? One reason is that such courses reflect parallel growth in the number of
countries, and why entrepre- individuals choosing to become entrepreneurs—or at least to start their own
neurship is an increasingly businesses. Each year, more than 600,000 new businesses are launched in the
popular career choice. United States alone, and this number almost doubled in the past two decades.9
Not all of these start-ups would meet our definition for involving
entrepreneurship, but all of them—to the extent they are successful—
contribute to economic growth. Consider the following facts:
n During the past two decades, large corporations in the United States have
downsized (a kind word for ‘‘eliminated’’) more than 6 million jobs, yet
unemployment fell to record-low levels—mainly as a result of new
companies started by entrepreneurs.
n In recent years, more than 900,000 new start-up companies were founded
in the United States (U.S. SBA, 1999, 2001).
n Currently, more than 10 million individuals are self-employed in the
United States (U.S. SBA 1998, 2002)—about one in eight adults! And taken
together, U.S. firms with fewer than 500 employees (many of which were
started by entrepreneurs), account for 51 percent of private sector output,
employ 51 percent of private sector workers, and constitute 99 percent of
all employers (U.S. SBA, August 2001).
n Even though the number of new businesses started each year has
increased steadily, the number started by women and minorities rose
even more dramatically; for instance, the number of companies owned by
minorities increased 168 percent between 1987 and 1997, to a total of
3.25 million businesses employing more than 4 million and generating
$495 billion in revenues (U.S. SBA, 1999).
These statistics suggest that the activities of entrepreneurs have a truly
major impact on the economies of their societies.
Even a casual glance backward at history suggests that entrepreneurs have
always existed and always ‘‘made waves’’ in their societies: Vast fortunes were
certainly amassed by entrepreneurs of the past such as John D. Rockefeller,
Andrew Carnegie, and Cornelius Vanderbilt. Yet, more people than ever are
pursuing, or considering, this role. For instance, look at Figure 1.3; it shows the
number of franchises sold each year from 2000 to 2005. (Many people who want
Figure 1 . 3
370,000
Interest in Entrepreneurship: On The number of franchises sold
the Rise rose sharply in recent years. 351,000
350,000 342,000
As shown here, the number of 338,000
franchises sold each year in the
330,000
Franchises Sold
United States increased greatly.

Because franchising is one means 310,000
for individuals to become entre- 310,000
preneurs (or, sometimes, to get
291,000
ready to become entrepreneurs 290,000
by gaining important kinds of
274,000
experience), this trend reflects
growing interest in entrepreneurship. 270,000
250,000
2000 2001 2002 2003 2004 2005
Year
Source: Adapted from Entrepreneur Magazine, January 2005, p. 79.
ß Matt Stroshane/Bloomberg News/Landov
ß Bettmann/CORBIS
ß Bettmann/CORBIS
Figure 1 . 4 The Romance of Entrepreneurship
In a sense, entrepreneurs are the new heroes and heroines—they are often presented in flattering terms by the media. As a result, the
appeal of becoming an entrepreneur increased greatly in recent years. Shown here are famous entrepreneurs of the past and present—
Pierre Omidyar, J. D. Rockefeller, and Andrew Carnegie.
to become entrepreneurs use franchises as a means of attaining this dream; see

Chapter 8.) As you can see, the numbers are both amazing and rising rapidly.
What factors are responsible for this trend? Many appear to be playing a
role. First, the media are filled with glowing accounts of successful
entrepreneurs such as Howard Schultz (Starbucks), Pierre Omidyar (eBay;
see Figure 1.4), and Scott Cook (Intuit). As a result, the role of entrepreneur has
taken on a positive and attractive aura. In an age when political and military
heroes are few and far between, entrepreneurs, in a sense, become the new
heroes and heroines, so it is far from surprising that growing number of
individuals are choosing to pursue this kind of career.
Second, there has been a fundamental change in what has often been
termed ‘‘the employment contract’’—the implicit understanding between
employers and employees.10 In the past, this implicit agreement suggested that
as long as individuals performed their jobs well, they would be retained as
employees. Now, in an era of downsizing and ‘‘rightsizing,’’ this agreement
has been rewritten, with the result that many individuals feel little loyalty to
their current employers. It is just one small step from such feelings to the
conclusion, ‘‘I’d be better off working for myself!’’
A third factor is a change in basic values. In the past, job or career security
was a dominant theme for many people: They wanted a secure job with steady
increments in salary. Now, surveys indicate that young people, especially,
prefer a more independent lifestyle—one that offers choice in place of certainty
or predictability.11 Together, these and many other factors combine to bolster
the allure of becoming an entrepreneur and, as noted previously, translate into
the creation of hundreds of thousands of new businesses employing millions
of people. This trend is stronger in the United States than elsewhere, but seems
to picking up steam around the world as government leaders in many
countries recognize that entrepreneurs do matter—and matter greatly.
The Field of Entrepreneurship:

Foundations in Other Disciplines
Nothing, it has often been said, emerges out of a vacuum. And where the
field of entrepreneurship is concerned, this is certainly true. Entrepreneurship,
as a branch of business, has important roots in several older and more
established fields—and with good reason. Consider, again, our definition of
entrepreneurship—a field of study that seeks to understand how opportunities to

create new products or services, new markets, production processes, ways of
organizing existing technologies, or raw materials arise and are discovered by
specific individuals, who then use various means to develop them. This definition
implies that in order to understand entrepreneurship as a process—and as an
activity in which entrepreneurs engage—it is essential to consider (1) the
economic, technological, and social conditions from which opportunities arise,
(2) the people who recognize these opportunities (entrepreneurs), (3) the business
techniques and legal structures they use to develop them, and (4) and the
economic and social effects produced by such development. All of these elements
play a role in entrepreneurship, and all must be taken into account if we are
ever to fully understand this complex process. These elements, in turn, imply
that the field of entrepreneurship is closely linked to older disciplines such as
economics, behavioral science (psychology, cognitive science), and sociology.
The findings and principles of these fields can shed much light on many aspects
of entrepreneurship and provide valuable frameworks for understanding key
questions addressed by the field—questions such as ‘‘How do opportunities
arise?’’ (see Chapter 2), ‘‘Why do some individuals but not others recognize
them?’’ (see Chapter 3), and ‘‘What factors influence the success of new ventures
after they are launched?’’ (see Chapters 10, 11, and 12).
Admittedly, these questions are somewhat abstract, so perhaps a concrete
example will be helpful. Consider the rapid growth of one successful high-tech
company: Expedia.com. Expedia is an online travel service that allows users to
book flights, hotel rooms, and rental cars from any computer with access to
the Internet. The company’s growth has been swift, so it seems clear that its
founders recognized an excellent opportunity and went on to exploit it well.
But now consider the following question: Could Expedia.com have
been launched 10 years ago? The answer is ‘‘Almost certainly no.’’ And the
reason it could not is straightforward: technological, economic, and social
forces had not yet generated the opportunity that the founders of Expedia.com
recognized. From a technological point of view, an online travel service could
not exist until many millions of people had access to the Internet, and
until software capable of integrating the schedules of dozens of airlines and
the rates of thousands of hotels existed. From an economic point of view, such
a service could not be viable until a safe and reliable way of making payments
over the Internet existed and unless airlines and hotels were willing to pay
commissions to an Internet company instead of, or in addition to, traditional
travel agents. Finally, from a social perspective, an online travel service
could not exist and prosper until large numbers of people had enough
confidence in online information and transactions to entrust their travel plans
to it, and until large numbers of people became aware of the fact that travelers
on the same flights often paid hugely different fares (see Figure 1.5). In sum,
the opportunity for founding Expedia.com did not always exist; rather, it
emerged—and became available for discovery by specific individuals—out of
a combination of many factors, economic, technological, and social.
In a similar manner, the disciplines of economics, behavioral science, and
sociology can help to provide answers to other basic questions addressed by the
field of entrepreneurship, questions such as: ‘‘Why do some individuals but not
others recognize opportunities?’’ ‘‘Why are some entrepreneurs so much more
successful than others?’’ and ‘‘Why are some means for developing opportunities
more effective than others?’’ Clearly, then, the field of entre preneurship does not
exist in an intellectual vacuum; rather, its roots rest firmly in several older
disciplines that, together, provide it with a firm foundation for understanding one
of the most complex—and important—business processes in existence.
One final comment: Are some of these disciplines more useful than others
in our efforts to understand entrepreneurship as a process? In other words,
should we focus primarily on economic factors, on factors relating to
entrepreneurs, or on factors relating to society as a whole in our efforts to
Figure 1 . 5
Opportunities Often Emerge from
Change
In recent years, increasing numbers
of persons have become aware of
the fact that people on the same
flights or staying in the same hotels
often pay different rates. This
awareness was one factor that
created the opportunity
Copyright 2003 Expedia, Inc. All rights reserved.

Expedia.com and similar companies
have exploited.
understand the entrepreneurial process? This issue has sometimes been

debated in the context of a distinction found in several other branches of
management: macro versus micro approaches.12 Macro approaches take a
‘‘top-down’’ perspective, seeking to understand how and why new ventures
are founded, and why they succeed or fail, by focusing largely on what are
often termed environmental factors—economic, financial, industry, and political
variables. Presumably, these factors, which are largely beyond the direct
control of individuals, shape the behavior and decisions of individual
entrepreneurs, so understanding their impact is crucial. In contrast, micro
approaches take a ‘‘bottom-up’’ perspective, seeking to understand the
entrepreneurial process by focusing primarily on the behavior and thoughts
of individuals or groups of individuals (e.g., founding partners). Presumably,
it is the way in which individuals behave that is the key to understanding the
entrepreneurial process. Is either view more accurate or more useful than the
other? Absolutely not. We believe that full understanding of entrepreneurship
can only be gained through careful consideration of both perspectives. In fact,
we agree strongly with one colleague who recently noted that a key defining
aspect of entrepreneurship is that it involves efforts to understand how micro
factors (e.g., the ideas, thoughts, and actions of individuals) interface with
environmental factors (technology, life cycle of a given industry, economic
conditions, etc.).13 In other words, a central question in the field of
entrepreneurship is: ‘‘How are the motives, ideas, and intentions of individual
entrepreneurs and the environmental conditions they face (e.g., conditions in
specific markets of industries) reflected in the kind of companies they start?’’
In essence, the two approaches are complementary, and both are needed to
gain a full understanding of entrepreneurial process. For this reason, both will
be represented throughout this book.
What Entrepreneurs Do Versus What, Perhaps,

They Should Do: Where Research-Based
Principles Meet Actual Practice
As we mentioned earlier, one of us (Baron) has been an entrepreneur; in fact, he
has started and run two different companies. These experiences were, by and
large, very good ones, but when Prof. Baron thinks about them, he often ponders
this thought: ‘‘How great it would have been to have had the knowledge in this
book when he started those companies!’’ Looking back, he now realizes that he
made virtually every mistake that lies in wait for unsuspecting entrepreneurs–
mistakes that experienced ones generally avoid. From choosing a partner (not
well!) to signing a licensing agreement (too favorable to the large company that
licensed Prof. Baron’s technology), he made one serious error after another.
Despite this, both companies survived and were profitable, but how well might
they have done if he had known how to avoid these mistakes?
We’ll never know, but it seems possible that the answer is that these
companies would have been much more successful. We mention these
personal experiences here because they illustrate what we think is the real and
lasting value of this book—one reason you may want to keep it on your
bookshelf in the years ahead. In the pages that follow, we don’t simply
describe what entrepreneurs do—how they recognize opportunities, obtain
financing, start companies to exploit these opportunities, and so on. In
addition, we will also try to indicate what, perhaps, they should be doing
during each phase of the entrepreneurial process. In other words, we will try
to tread the fine line between actual practice—what goes on in the hectic and
turbulent world entrepreneurs face each day—and steps that, according to the
findings of careful research, would be helpful to them in their efforts to start
and run successful new ventures. For this reason, we’ll cover many practices
and activities that entrepreneurs do not always recognize and adopt but
which, we believe, can be highly beneficial. For instance, research findings
suggest that entrepreneurs who engage in such activities as performing a
careful feasibility analysis (a preliminary evaluation of a business idea to
determine whether it seems worth pursuing; see Chapter 3), developing clear
business models (a company’s plans for how it will compete, use its resources,
deal with customers, and generate profits; see Chapter 7), and engaging in
careful competitor analysis (detailed analysis of a company’s competitors, as an
initial step in planning how to gain competitive advantages over them; see
Chapter 4) are more likely to succeed than those who do not.14 Sad to say,
Professor Baron did not perform these activities when he started his own
companies, and he is now convinced that not doing so had negative
consequences for the success of these new ventures.
In short, after reading this book and making the concepts and ideas it
presents your own, you will, we firmly believe, be much better prepared to
meet the challenges of starting a new venture than was true for Prof. Baron—
and perhaps a majority of all first-time entrepreneurs. So no, we definitely do
not have all the answers, at least not perfect or complete ones; the field of
entrepreneurship is still too young for that. But we can offer advice for actions
and procedures that will help tip the balance in your favor as an entrepreneur.
So please read on; the new ventures that benefit will be your own!
n Entrepreneurship, as a field of business, seeks n Entrepreneurship, as a branch of business,

KEY to understand how opportunities to create has important roots in economics, behavioral
POINTS something new (new products or services, science, and sociology.
new markets, new production processes or n The field of entrepreneurship recognizes that
raw materials, new ways of organizing existing both the micro perspective (which focuses on
technologies) arise and are discovered or the behavior and thoughts of individuals) and
created by specific individuals, who then use the macro perspective (which focuses pri-
various means to exploit or develop them, thus marily on environmental factors) are important
producing a wide range of effects. for obtaining a full understanding of the
n In recent years, the allure of entrepreneurship entrepreneurial process.
has increased, with the result that more n This book will do more than describe what
people than ever before are choosing this entrepreneurs do (common practice); it will go
activity as a career. further and describe actions and procedures
entrepreneurs can perform to increase the
likelihood that their companies will succeed.
Entrepreneurship: A Process
Perspective
Now that we have offered a working definition of entrepreneurship,
learning
objective 3
Describe the process
highlighted its importance, and briefly described its roots in related perspective of entre-
disciplines, we will turn to another key task: suggesting a framework for preneurship, and list the
understanding it as a process. This will be a guiding theme for the remainder major phases of this
of this book, so it is important that we present it clearly and that you process.
understand fully what it implies.
The view that entrepreneurship is a process rather than a single event is
certainly not new or unique to this text; on the contrary, there is a growing
consensus in the field that viewing entrepreneurship as a process which
unfolds over time and which moves through distinct but closely interrelated
phases is both useful and accurate.15 Further, there is general agreement that
the key phases in this process are as follows:
n Recognition of an Opportunity: The entrepreneurial process often begins
when one or more individuals recognize an opportunity—the potential to
create something new (new products or services, new markets, new
production processes, new raw materials, new ways of organizing existing
technologies, etc.) that has emerged from a complex pattern of changing
conditions—changes in knowledge, technology, economic, political, social,
and demographic conditions.16 Opportunities have the potential to
generate economic value (i.e., profit) and are viewed as desirable in the
society in which they occur (i.e., development of the opportunity is
consistent with existing legal and moral standards, and would, therefore,
not be blocked or constrained by these standards).
We will examine the emergence of opportunities in Chapter 2 and the
cognitive roots of entrepreneurship in Chapter 3, but for the moment, we
want to emphasize just one point: in a sense, there really is nothing
‘‘entirely new under the sun.’’ Ideas do not emerge out of a void; on the
contrary, they almost always consist of a novel combination of elements
that already exist. What is new is the combination and the recognition of
links or connections between the various elements of which the ideas are
composed. To take a striking example from history, Alexander Graham
Bell did not invent the telephone out of sheer creative genius. Rather, he
combined component ideas that already existed and had been generated
by other people (e.g., electric batteries, basic research on the nature of
sound, etc.) in a new way and invented a product that revolutionized
human communication.
Similar argument holds for recognizing opportunities. The oppor-
tunities themselves often emerge from changes in economic, technological,
governmental, and social factors. When entrepreneurs notice links or
connections between these changes (i.e., when they notice patterns in these
changes), ideas for new ventures may quickly follow. For instance,
consider Bill and Cheryl Brown, who recently started The Second Time
Around, Inc., a company that helps people getting married for the second
(or third or fourth) time plan their weddings (see Figure 1.6).17 The
company experienced tremendous growth because, in essence, its
competitors—existing wedding services—focus entirely on young people
getting married for the first time. Bill and Cheryl Brown noticed, however,
that several recent trends converge to suggest the need for a company like
theirs. First, the number of people getting married who have been married
before has increased dramatically. Second, because these individuals tend
to be older than people marrying for the first time, they often have greater
financial resources. Another, and seemingly unrelated trend is that
older people in many societies seem increasingly willing to

‘‘indulge’’ themselves—they do not want to miss out on
experiences simply because they are in their forties or fifties
instead of their twenties and thirties. At first glance, these trends
and events might seem to be unrelated, but when considered
together, a striking pattern emerges: Millions of people in the
United States who need help planning their second or third
wedding. The idea for Second Time Around was suggested by
this emergent pattern, and the company provides a clear
illustration of how diverse events and trends can combine to
produce a new and potentially profitable business opportunity.
Courtesy, Twice is Nice Encore Bridal Creations LLC

n Deciding to Proceed and Assembling the Essential Resources:
Having an idea for a new product or service or recognizing an
opportunity is only, of course, the first step in the process. At
that point, an initial decision to proceed—to do something active
about the idea or opportunity—is required. As Shane, Locke,
and Collins suggest, the entrepreneurial process occurs because
specific individuals make this decision and act upon it.18 So, in
their view, understanding entrepreneurs’ motives is crucial to
comprehending the entire process. Deciding to start a business is
one thing; actually doing so is quite another, and would-be
entrepreneurs quickly discover that they must assemble a wide
array of required resources: basic information (about markets,
Figure 1 . 6
competitors, environmental and legal issues), human resources (partners,
‘‘Connecting the Dots’’ To initial employees), and financial resources. Gathering these resources is one
Recognize New Business of the most crucial phases of the entrepreneurial process, and unless it is
Opportunities completed successfully, opportunities, no matter how attractive, or ideas
Opportunities for new ventures for new products and services, no matter how good, ‘‘die on the vine,’’ so
often emerge out of changes in a to speak. It is at this stage, and especially when seeking financial backing,
wide range of economic,
technological, governmental, and
that entrepreneurs typically prepare a formal business plan—a detailed
social factors. Even though these description of how they plan to develop their new venture. (Assembly of
trends and changes may seem, at required resources will be covered in Chapters 4–8.)
first glance, to be unrelated, n Launching a New Venture: Once the required resources are assembled,
successful entrepreneurs perceive the new venture can actually be launched. Doing so involves a wide range
meaningful patterns that point to
potentially profitable business
of actions and decisions: choosing the legal form of the new venture,
opportunities. This was certainly developing the new product or service, establishing the roles of the top
true for Bill and Cheryl Brown who management team, and so on. Sadly, many new entrepreneurs do not fully
recognized the fact that millions of grasp the complexities of starting a new venture, and as we will note in
people in the United States who later chapters, this can burden them with problems that could, in fact,
are getting married for the second have been avoided. (The issues involved in actually launching a new
or third time might need the help venture will be covered in Chapters 8–11).
of a wedding service specifically
focused on their needs. The n Building Success and Managing Growth: Although moving from an idea
company they founded, The to an actual, going concern represents major progress, it is just the start of
Second Time Around, has been another key phase in the entrepreneurial process: running the new venture
highly successful. and building it into a growing, profitable business. Many entrepreneurs
recognize that this phase requires additional financial resources. However,
in our experience, a smaller proportion fully recognizes the importance of
two key factors in the process: developing effective strategies for
encouraging and managing growth, and management issues relating to
growth (e.g., being able to attract, motivate, and retain high-quality
employees; building effective relationships among founders of the new
venture). We cover both of these aspects of building growth in Chapters 12
and 13.
n Harvesting the Rewards: In this final phase, founders choose an exit
strategy that allows them to harvest the rewards they have earned through
their time, effort, and talents. Individual entrepreneurs must choose
carefully among the many ways of reaping the benefits of successful

entrepreneurship (see Chapter 14) so as to maximize the benefits they gain
from, in many cases, years of sacrifice and commitment.
One additional comment: We do not mean to imply here that entrepreneurship
can be readily divided into neat and easily distinguished phases. In fact, the
process is far too complex for that to be true. But the activities just described
do tend to unfold over time in an orderly sequence, with idea generation or
opportunity recognition occurring first, an active decision to proceed, next,
and so on. We believe that viewing entrepreneurship in this manner offers
several benefits. First, it helps avoid a static view of entrepreneurship—one
that sees it as a specific act (launching of a new venture) that occurs and is then
complete. Such a view ignores the fact that entrepreneurs face an ever-
changing array of tasks and challenges, and that they often think and feel
differently about these tasks and challenges as they change and unfold.
Second, viewing entrepreneurship as an ongoing process draws attention
to the key activities entrepreneurs must perform as they proceed with their
efforts to convert ideas for new products or services into successful businesses.
How well entrepreneurs perform these activities is often more central to their
success than their personal characteristics or background—although, of course,
these are important, too.19 Attention to the tasks entrepreneurs perform, in
turn, gives us a good handle on identifying the skills, knowledge, and
characteristics they need to function effectively in this role. So from this angle,
too, a process perspective is useful. Finally, viewing entrepreneurship as a
process suggests very strongly that different factors may affect it at different
points in time, and that the effects or importance of specific factors may well
change over the course of new venture creation. For example, consider the
question of whether entrepreneurs are more ‘‘risk prone’’ than other people—a
question that has received a great deal of attention in recent years. Some
research findings suggest that entrepreneurs are indeed ‘‘riskier’’ than other
people,20 while other findings from equally careful research point to the
opposite conclusion—that entrepreneurs are less willing to take risks than other
groups, such as managers.21 How can both findings be true? One possibility is
that whether entrepreneurs are more or less risk-prone than other people
depends on which phase of the entrepreneurial process we are considering. For
instance, early on, entrepreneurs must, almost by definition, be relatively
willing to accept risk: If they were not, they would never give up secure jobs to
start new ventures. But later on, once they have launched a new venture and
must pay bills, meet payrolls, and manage limited resources, they may shift
toward becoming much less accepting of risk. In essence, entrepreneurs’
behavior—and the role of risk in their decisions and strategies—may change
considerably over the entrepreneurial process. Recent findings suggest that as
this logic suggests, the impact of many factors on entrepreneurs’ behavior and
success does indeed change over the course of new venture creation.22 An
overview of the major phases of new venture creation is shown in Figure 1.7;
please examine it carefully, because it provides a basic framework for
understanding much of what follows in later chapters.
Levels of Analysis: Micro Versus Macro Revisited

Until recently, considerable disagreement existed in the field of entrepreneur-
ship over the following question: In studying the entrepreneurial process,
should we focus primarily on the entrepreneur (e.g., this person’s skills,
abilities, talents, motives, traits—and perhaps, as we’ll explain in a later
section, even biological or genetic factors23), or primarily on the economic,
technological, and societal context in which the entrepreneur operates
(economic and market conditions, government policy, etc.)? As you can
Individual-Level Variables (skills, motives, characteristics of entrepreneurs)

Group-Level Variables (ideas, input from others; effectiveness in interactions
with venture capitalists, customers, potential employees)
Societal-Level Variables (government policies, economic conditions, technology)
All phases are influenced by

these three levels of variables
Idea for New Product Assembling the Required Actual Launch Building a Harvesting the
Initial Decision
or Service and/or Resources (information, of New Successful Rewards
to Proceed
Opportunity Recognition financial, people-related, etc.) Venture Business (exit by founders)
Time
Figure 1 . 7 Entrepreneurship as a Process: Some Key Phases

The entrepreneurial process unfolds over time and moves through a number of different phases. Events and outcomes during each phase
are affected by many individual-level, group-level, and societal-level factors.
guess from our earlier comments on the macro/micro issue, we view this
question as largely irrelevant. We believe that at every stage of the
entrepreneurial process, individual-level (i.e., micro) variables, group or
interpersonal-level variables, and societal-level (macro) variables all play a
role (please refer again to Figure 1.7.)
For instance, consider the question of opportunity recognition. Certainly,
this crucial process occurs in the minds of specific individuals and must,
therefore, reflect the impact of individual-level variables such as the existing
knowledge structures and the unique life histories of these individuals. But
nothing that has to do with people—not even basic aspects of cognition—
occurs in a social vacuum. The kind of ideas people generate reflect the times
in which they live, the current state of technological knowledge, and many
other aspects of the societies. Further, other people with whom the entrepre-
neur has contact—friends, associates, or even figures in the mass media—often
suggest the basis of an idea for a new product or service. For instance, recent
findings indicate that entrepreneurs who have a mentor—an older and more
experienced person with whom they work and who influences their career—
tend to recognize more opportunities than entrepreneurs who do not enjoy the
benefits of having a mentor.24 In short, all three levels of analysis (individual,
group, societal) are relevant and must be considered in order to understand
idea generation fully.
Here’s another example of the importance of considering both micro and
macro factors (individual-level, group-level, and societal-level variables) in
our efforts to understand entrepreneurship: Why do some individuals, but not
others, choose to become entrepreneurs? Again, all three categories of
variables play a role. With respect to individual factors, some individuals
have higher energy, are more willing to accept risk, and have greater self-
confidence (self-efficacy) and greater tolerance for stress than others; those
high on these dimensions—and especially self-efficacy25—are probably more
likely to choose the entrepreneurial role.26 Direct evidence for the role of
individual-level factors in choosing to become an entrepreneur is provided by
many studies. Among these studies, one of the most unusual27 compared the
levels of testosterone shown by male MBA students who had previously
started new ventures and those who had not. Results indicated that those who
had previously chosen to become entrepreneurs had higher levels of this male
hormone! Further evidence suggested that this difference stemmed from a

greater tendency toward risk on the part of the entrepreneurs, at least early in
the process.
The Possible Role of Genetic and Other Biological Factors:

The ‘‘Micro’’ Perspective Carried to the Limit
The findings we just described, surprising as they may be, are actually related
to a suggestion you may well find even more provocative—the idea that
genetic or biological factors, too, may play a role in entrepreneurship! How
can this be? The authors who propose this idea28 note that genetic factors have
been found to play a role in several tendencies and predispositions that have
been found, in turn, to be closely related to entrepreneurship. For instance, a
genetic component is a factor in how individuals’ brains react to high levels of
risk; some people find such conditions more pleasant or acceptable than others
because, in part, they have genetically inherited tendencies to respond
positively or negatively to risk. Some enjoy it, while others dislike it, which, in
part, reflects differences in how their brains function.
Similarly, genetic factors play a role in how people react to overcoming
obstacles or to engaging in the same activities for a long period of time. These
factors, too, have been found to be related to entrepreneurship: Entrepreneurs
show greater persistence than most people in overcoming obstacles and in
engaging in the same activity for long periods of time.29 Third, it is well
established that genetic factors play a role in the development of specific skills
or abilities. These skills and abilities, in turn, lead individuals to pursue different
kinds of careers and to seek employment in different industries. For instance,
people with high mathematical or quantitative abilities may choose to work in
technical or scientific fields. Because these areas offer greater opportunity for
engaging in entrepreneurship than other fields or industries, the likelihood that
such individuals will become entrepreneurs is enhanced. So, through this
indirect route, genetic factors can influence entrepreneurship. We could
continue because several other factors found to play a role in entrepreneurship
are ones that are determined, at least in part, by genetic factors.30
Please don’t misunderstand: There is no suggestion here that genetic
factors directly lead individuals to become entrepreneurs. Rather, the basic
idea is that genetic and biological factors predispose individuals to develop
certain characteristics, skills, or preferences, which in turn lead them to be
more or less attracted to the kind of activities entrepreneurs perform and the
kinds of environments in which they operate (see Figure 1.8). This intriguing
possibility is just now becoming the focus of careful research. Stay tuned: The
findings promise to be both interesting and surprising.
Group-Level and Societal-Level Factors Figure 1 . 8

Turning to group-level factors, it seems possible that individuals who receive Are Entrepreneurs ‘‘Born’’? The
encouragement from friends or family members and those who have been Possible Role of Genetic Factors
in Entreprneurship
Recently, it has been proposed that
genetic factors may play a role in
The Development
of Various
entrepreneurship. One mechanism
Predispositions through which genetics may exert
Characteristics, such effects is indirect in nature.
Preferences Preference for Genes have been found to strongly
Genetic Certain Kinds influence several characteristics—
Entrepreneurship
Factors of Activities and personal dispositions that have
Environments also been shown to increases the
Development of likelihood that people will become
Various Skills entrepreneurs. In essence, then,
and Abilities some individuals may be
predisposed to become
Source: Based on suggestions by Nicolaou and Shane, 2006; see note 23. entrepreneurs by their own genetic
nature.
exposed to entrepreneurs in their own lives are more likely to proceed than
ones who do not receive encouragement and have not been exposed to models
of entrepreneurs. For instance, when Enron, a huge energy company based in
Houston imploded as a result of a series of accounting scandals (October
2001), members of the local business community feared that a large number of
highly talented people would leave the Houston area. To keep them around,
they organized Resource Alliance Group, a company whose sole mission was
that of helping former—and highly talented—Enron employees to become
entrepreneurs. They succeeded to an amazing degree: Within just three
months, they had helped 25 senior Enron employees to found new ventures.
Just a few short years later, several of these companies became profitable and
were adding good jobs to the Houston-area economy. So clearly, group-level
(i.e., social) factors such as help and encouragement from others can play a key
role in the entrepreneurial process.
Societal-level factors, too, are important. Individuals who come from
certain social and economic backgrounds, or who live in countries where
government policies are favorable to starting new ventures, are more likely to
choose this role than individuals from other backgrounds or who live in other
countries. We could continue with other examples, but by now, the main point
should be clear: Individual-level, group-level, and societal-level factors
influence every action and every decision taken by entrepreneurs during all phases
of the entrepreneurial process. Taking note of this fact, we will employ all three
levels of analysis throughout this text. Although this approach adds
complexity to our discussions of many topics, it will also offer a more
complete, accurate, and useful picture of what we know about the process of
entrepreneurship and how, perhaps, it can be made to run more smoothly for
entrepreneurs. If those are not the ultimate goals of any text, then we, as
authors, researchers, and entrepreneurs, have no idea as to what they should be!
learning
objective 4
Explain why entrepreneurship
Entrepreneurship: The Intersection of Valuable
Opportunities and Enterprising Individuals
can be viewed as arising out of Several years ago, one of us (Robert Baron) had the honor of introducing a
the intersection of enterprising highly successful entrepreneur, Mukesh Chatter, at a banquet held in his
people and opportunities. honor. (Mr. Chatter was receiving the ‘‘Entrepreneur of the Year’’ award given
annually by Prof. Baron’s university, and had just sold his company to Lucent
Technologies for almost one billion dollars.) During his acceptance speech,
Mr. Chatter made the following remarks:
Success comes from many sources. Yes, you have to recognize an opportu-
nity. . . . But to recognize it, it has to be there in the first place—something
must have changed so as to generate the opportunity. After that, you have to
recognize it and be able to tell that it is a good one—something you can turn
into a successful business. Luck definitely plays a role; you have to be in the
right place at the right time and know the right people who can help you. But
after that, it’s largely a matter of hard, mind-bending work; if you are not
willing to put in the hours and give up lots of other things in your life, you
won’t succeed—you won’t make it happen.
We view these remarks as highly insightful. In just a few sentences,
Mr. Chatter captured another key theme in entrepreneurship—and this book.
Briefly stated, this theme suggests that it is the intersection of valuable
opportunities and enterprising individuals that is the essence of entrepreneur-
ship. Opportunities, as Mr. Chatter pointed out, are generated by changing
economic, technological, and social conditions; but nothing happens with
respect to these opportunities until one or more energetic, highly motivated
individuals recognizes them and the fact that they are worth pursuing. This is
Figure 1 . 9
Entrepreneurship: What
Sometimes Happens When
Enterprising
New Business Individuals Enterprising Individuals Meet
Entrepreneurship
Opportunities (people willing to New Opportunities
accept risk, etc.) What is the essential nature of
entrepreneurship? Shane (2003)
suggests that it occurs when
individuals willing to assume some
risk recognize new business
an important point: Opportunities vary greatly in their potential value, with opportunities—and decide to act
the result that only some are worth pursuing. In other words, only for some on them.
opportunities is the ratio of risk-to-potential benefits sufficiently favorable to
justify efforts to exploit them. As you have probably observed yourself, some
business opportunities are superior to others. They occur in industries that are
faster growing or ones in which customer needs are easier to identify or
satisfy. Further, some opportunities are easier to protect against competition.
In Chapter 2, we carefully examine the specific characteristics that make some
opportunities more promising than others. The key point we wish to make
here, however, should be obvious: At the very heart of entrepreneurship is a
nexus (connection) between opportunities and people (see Figure 1.9). It is this
connection or intersection that starts the process—and sometimes changes the
world!
n Entrepreneurship is a process that unfolds n Individual, group, and societal factors influ-
KEY over time and moves through distinct but ence all phases of the entrepreneurial pro-
POINTS closely interrelated phases. cess. Thus, there is no reason to choose
n The entrepreneurial process cannot be div- between a ‘‘micro’’ and a ‘‘macro’’ approach
ided into neat and easily distinguished stages, to entrepreneurship; both perspectives are
but in general, it involves generation of an idea necessary.
for a new product or service and/or recogni- n It is the nexus of valuable opportunities and
tion of an opportunity, assembling the re- enterprising individuals that is the essence of
sources needed to launch a new venture, entrepreneurship.
launching the venture, running and growing
the business, and harvesting the rewards.
The Cutting Edge: Emerging

Issues and Questions
There can be no doubt that entrepreneurs encounter change on a daily basis
learning
objective 5
Understand why this
when starting and running their new ventures. In fact, in a sense, change is text will both describe
what entrepreneurship is all about: creating something new—profitable new what entrepreneurs ac-
ventures—where none existed before, bringing new products and services to tually do and what, per-
market, meeting new and emerging customer needs. As a field of study in haps, they should do!
business, entrepreneurship reflects this basic reality. Partly because it draws
on several different existing disciplines (strategy, organizational behavior,
cognitive science, etc.), and partly because it is still quite new, it is literally
overflowing with interesting issues and questions. To provide you with a
sense of the breadth this work, we’ll now highlight just a few of the topics that
many researchers would view as ‘‘on the cutting edge’’—topics related to
important aspects of the entrepreneurial process that have recently become the
focus of increased attention and study.
University-Based Technology Transfer: How

learning
objective 6
Describe several issues and
Universities Encourage Entrepreneurship
Universities are a prime source of new knowledge; in fact, providing it is one
questions about entrepreneur- of their most important roles. This suggests that they might also serve as the source
ship that are currently receiving of ideas for new products, services, means of production, and so on. In fact, this
greater attention in the field idea is now widely accepted, with the result that many universities have
(e.g., university-based technol- established technology transfer offices charged with the task of helping to move
ogy transfer). scientific and technological discoveries by faculty from the laboratory to the
marketplace. To encourage this process, legislation adopted in the United States
(the Bayh-Dole Act) has made it possible for universities to own patents on
inventions that were developed under federal research grants, which support the
research of individual scientists or teams of scientists. Has this legislation
encouraged patenting by universities, and hence the commercialization of
technological and scientific breakthroughs? This and related questions have recently
received growing attention from entrepreneurship researchers. Results are mixed:
overall, the Bayh-Dole Act has not generated an increase in patenting by universities.
However, it has encouraged patenting in fields or areas where licensing is an
effective means of gaining new technical knowledge and generating revenue.31
Additional research on the role of universities in encouraging entrepreneurial
activities suggests that both the quality of faculty (e.g., to what extent are they
leaders in their field?) and the level of industry research funding received by a
university are both important predictors of the number of start-up companies
formed on the basis of the discoveries of faculty research.32 Overall, then, a
growing body of evidence suggests that universities can indeed play an important
role in encouraging entrepreneurship, with major benefits both to the universities
and to society. It is not at all surprising, then, that studying this process is
currently a topic of considerable interest in the field of entrepreneurship.
Incubators and Science Parks:

Helping New Ventures Grow
By now, you may be wondering about the following question: How,
specifically, do advances achieved in scientific research conducted at
universities find their way into start-up ventures? Licensing, in which the
rights to patented inventions are granted to start-ups, is one important way.
Another is through incubators and science parks, organizations focused on the
mission of encouraging business growth in a specific region by combining and
sharing knowledge. The number of such centers in North America is
increasing rapidly, from only 12 in 1980 to more than 950 in 2002, and this
number continues to rise. Most incubators are associated with universities, but
in Asia and elsewhere, science parks sometimes stand alone and are not
closely linked to a specific university. Both incubators and science parks are
designed contribute to economic growth by nurturing young companies in a
protected environment—one in which start-up ventures can rent space at
favorable prices and benefit from the proximity of a large number of scientists
and engineers on the university’s faculty (see Figure 1.10).33 In fact, many
successful companies have come out of incubators and science parks. For
instance, at Rensselaer Polytechnic Institute (RPI), the university where one of
us (Baron) works, many businesses that are now highly profitable and are
publicly traded on national stock markets were started in the university’s
incubator. One such company, MapInfo, Inc., specializes in helping companies
pinpoint locations for new branches, and in assisting governments to improve
public safety and deal with security issues. A strong need for such services
existed, and the founders of MapInfo recognized and exploited it.
Research is currently being conducted to deter-

mine the best ways for incubators and science parks to
achieve their primary mission of helping to move
advances in science and technology into useful
products and services as quickly as possible.34
Incubators and science parks may well play an
increasing role in the founding of many new ventures
in the future, so again, it is far from surprising that
studying them is another ‘‘cutting-edge’’ topic in
Courtesy of Robert A. Baron

entrepreneurship research.
Entrepreneurial Cognition:
A Look Inside the Mind
of the Entrepreneur Figure 1 . 10
Are entrepreneurs a ‘‘breed apart’’—different from other people in important Incubators and Science Parks:
ways? Most people—including many entrepreneurs—believe that they are. Yet, Encouraging Economic Growth
early efforts to identify the characteristics or behaviors that make entrepreneurs Through Entrepreneurship
unique generally yielded weak and inconsistent findings. Do these results mean All over the world, the number of
that almost anyone can fill this role and start a successful new venture? incubators and science parks is
Probably not; in fact, we feel that trying to understand entrepreneurship increasing rapidly. These
without understanding entrepreneurs is like trying to bake bread without yeast. organizations seek to enhance
Entrepreneurs are the active component and must, in one sense, be central to regional or even national economic
the entire process. But what is it about entrepreneurs that is crucial? Their growth by providing start-up
ventures with a protected
motives? Skills? Abilities? Experience? Growing evidence suggests that all environment—one in which they
of these factors are important,35 but perhaps the most impressive research can benefit from reduced costs and
concerning entrepreneurs to date has focused on entrepreneurial cognition—how the proximity of many scientists
entrepreneurs think, reason, make decisions, and perform many other cognitive and engineers. Shown here is the
activities.36 Growing evidence suggests that entrepreneurs may indeed differ incubator center at Rensselaer
from other people with respect to many aspects of cognition. For instance, they Polytechnic Institute—one of the
may perceive risk differently—perhaps as more tolerable or not as great—may first incubators in the United
States—that continues to support
be more subject to some cognitive errors (e.g., a tendency to be overly start-up companies based on
optimistic), may be more capable of recognizing connections or patterns in research by faculty or current and
seemingly unrelated events or trends (and hence, better at recognizing former students.
opportunities), and more likely to think long and hard about unexpected or
surprising events or outcomes.37 Moreover, successful entrepreneurs, as
compared to less successful ones, may have better mental frameworks for
identifying good opportunities than other individuals—frameworks that are
more complete and accurate—and take into account practical matters such as
speed of revenue generation and solving customers’ problems.38
These possibilities are just the ‘‘tip of the iceberg’’ where the study of
entrepreneurial cognition is concerned, but we hope the main point is clear:
Insights into how entrepreneurs think about opportunities, markets, risk,
competitors, their companies, and many other topics can greatly increase our
understanding of how the entrepreneurial process unfolds. For this reason,
entrepreneurial cognition, too, is a ‘‘cutting edge’’ topic in the field of
entrepreneurship at the present time.
We should hasten to add that many other topics and issues are also
receiving a great deal of attention at the present time. The ones we present
here merely illustrate the broad range of diverse and intriguing issues that are
currently in the forefront of entrepreneurship research. Needless to say, we’ll
discuss these and many other cutting-edge topics in the remaining chapters of
this book as consistent with our view that we should present not simply a
description of what entrepreneurs do, but also guidelines for what they should
do based on the most up-to-date knowledge of our field.
n The field of entrepreneurship is broad in economic development in a region by en-

KEY scope and reflects the wide range of factors couraging the sharing of knowledge. Incuba-
POINTS that affect the founding and success of new tors are associated with universities, while
ventures. science parks may be entirely independent.
n One topic receiving a great deal of current n Recent research has also attempted to
attention is university-based technology understand the ways in which entrepreneurs
transfer—the ways in which universities some- think, reason, and make decisions: entrepre-
times encourage entrepreneurial activities by neurial cognition. Findings indicate that en-
faculty members and others. trepreneurs do indeed think differently in
several respects, and that their cognitive
n Another, closely related topic is the role of
processes often play a key role in the founding
incubators and science parks—
and success of new ventures.
organizations that seek to encourage
Sources of Knowledge About

Entrepreneurship: How We
learning
objective 7
Explain why certain sources of
Know What We Know
In the remaining chapters of this book, we will discuss many aspects of
knowledge about entrepreneur- entrepreneurship—how opportunities arise, how some people recognize them,
ship are more reliable and useful why some means of developing opportunities are better than others (at least in
than others. some contexts), why some entrepreneurs are successful while others fail, and
so on. As we discuss each of these issues, we will present the most accurate
and up-to-date information available. This goal, in turn, raises an important
question: How do we know which information is the most accurate and
useful? As any visit to a local bookstore will suggest, many potential sources of
information about entrepreneurship exist, with no shortage of self-proclaimed
experts on this topic. So how have we chosen the information to include in this
book? The answer is straightforward: We have selected information that has
been gathered in accordance with a set of rules or methods for acquiring
reliable knowledge—methods that prove extremely helpful in many fields
ranging from the physical sciences on one hand, through various branches of
management on the other. What are these methods, and can they really be
applied to the study of entrepreneurship? The methods themselves are quite
complex and well beyond the scope of this brief discussion; but their essential
nature was stated concisely by the French philosopher Diderot (1753) more
than 250 years ago:
There are three principal means of acquiring knowledge: observation,

reflection, and experimentation. Observation collects facts; reflection
combines them; experimentation verifies the result of that combination. . . .
That these methods can be used to study entrepreneurship is strongly
suggested by the fact that they are currently being employed in a large volume
of entrepreneurship research. Since this is the case, and since much of the
information presented in this text has been gathered through these methods,
we will describe them briefly here. Our goal is certainly not that of turning you
into an entrepreneurship researcher; on the contrary, it is simply to provide
you with a basic understanding of these methods so that you can become
a more informed consumer of knowledge about entrepreneurship, deciding
for yourself whether, and to what extent, alleged ‘‘facts’’ about it are really
accurate.
Observation, Reflection, and Experimentation:

Alternative Routes to Knowledge
Because it is the method most frequently used to study entrepreneurship, we’ll
learning
objective 8
Describe the nature of
start with systematic observation. The basic idea is straightforward: We three basic means for
observe certain aspects of the world systematically, keeping careful records of obtaining knowledge
what we notice. Then, we use this information as a basis for reaching about entrepreneurship—
conclusions about the topics we wish to study—and understand. For example, systematic observation,
suppose that a researcher is interested in increasing our knowledge of the case method, and
opportunity recognition—the process through which entrepreneurs identify experimentation—and the
opportunities for profitable new businesses. Imagine that this researcher has role of theory in the field
reason to believe that opportunity recognition involves noticing or recognizing of entrepreneurship.
patterns—connections between seemingly unrelated events, changes, or trends.
In other words, recognizing opportunities involves ‘‘connecting the dots’’
between such factors as advances in technology, changes in markets, shifts in
government policies, and other factors so as to form a recognizable pattern.39
The patterns entrepreneurs detect then point to opportunities for new
ventures. For instance, do you recall our discussion of Expedia.com? In that
discussion we pointed out that the idea for this new business involved
connecting several independent events and trends—the growing number of
individuals with personal computers, the development of secure means for
making purchases online, deregulation of the airline industry—which
produced huge variations in ticket prices. This basic process—perceiving
connections between various events and trends—may play a role in the
identification of many opportunities.
How would a researcher study this basic idea? One way to do so would
involve deriving from this reasoning one or more hypotheses, as yet untested
predictions or explanations for a set of facts, and then proceeding to test these
predictions by collecting relevant data. For instance, the researcher might
reason that if recognizing patterns plays a key role in opportunity recognition,
then the broader or more varied the work experience individuals have, the
better they will be at recognizing opportunities. Why? Because broad
experience helps individuals perceive connections between seemingly inde-
pendent events or trends. To test this idea, the researcher might then obtain
information on two variables—aspects of the world that can take different
values. One variable would be the breadth of work experience individuals
have had (from very narrow to very broad) and the other would be the
number of opportunities they have recognized (perhaps, the number of
companies they have started or the number of patents they have received—
this variable could potentially be measured in several different ways). The
researcher might then predict that these two variables will be correlated,
where changes in one are accompanied by changes in the other. Specifically,
she might predict that the more varied individuals’ work experience, the more
opportunities they will recognize or the greater the number of companies they
will start. Correlations can range from 1.00 to þ 1.00. Negative numbers
indicate that as one variable increases, the other decreases. Positive numbers
indicate that as one increases, so does the other. So in this case, the researcher
would predict a positive correlation between breadth of work experience and
number of opportunities recognized.
Research conducted in this manner can, and often does, add much to our
understanding of entrepreneurship. In fact, there is simply no substitute for
careful research if we really want to understand how the entrepreneurial
process unfolds and what factors influence it. All the ‘‘educated guesses’’
offered by self-proclaimed ‘‘experts’’ on entrepreneurship are not, in our view,
nearly as informative as the findings of careful research. (By the way, actual
research on this topic suggests that in fact, breadth of experience is positively
related to opportunity recognition.)40
The Case Method

Systematic observation is an important method of research in
entrepreneurship, and perhaps the one most frequently used, but
it is certainly not the only one. Another involves what Diderot
described as reflection. In entrepreneurship research, this
approach is the basis for the case method, which involves
gathering large amounts of data about one organization or
specific individuals, and then using this information to reach
conclusions about what factors influenced important outcomes
such as economic success. How could this method be used to
investigate opportunity recognition? One possibility is to gather
detailed information on famous entrepreneurs, to determine
whether they recognized important opportunities by ‘‘connecting
the dots’’ between various events and trends. As an example,
consider Chester Carlson, the individual credited with inventing
the modern copy machine and laser printers (see Figure 1.11).
At the time he invented (or rather, adapted) the basic
process used in copy machines (and in laser printers), the need
for better means of making copies, especially in business and
ß Bettmann/CORBIS
educational settings, was clear. During the 1940s and 1950s,

many products for making copies had been invented, but none
seemed to work very well. Why, then, was Chester Carlson able
to come up with one that worked well? Careful study of his
background and life suggest some intriguing possibilities. First,
Figure 1 . 11 he held both a law degree and a technical degree. As a result,
he understood both the strong need for improved means of
Chester Carlson: A Case Study in
making copies as well as several of the technical processes that
Entrepreneurship
might be used to meet this need. Further, once he decided to try to solve this
Why was Chester Carlson able to problem, he restricted his efforts (i.e., search) to technologies and processes he
come up with a practical and cost-
effective technology for making
understood well. By focusing on these processes, he may have enhanced his
dry, permanent copies—an own ability to perceive ways of connecting several processes into a means of
invention with far-reaching making dry, permanent copies. In other words, a detailed case study of
effects? Detailed study of his life Carlson’s activities offers support for the hypothesis that opportunity
and activities through the case recognition does indeed involve perception of complex patterns. Moreover,
method offers some intriguing using the case method also suggests that often those individuals who possess
possibilities and in this way, sheds the ‘‘cognitive equipment’’ needed to perceive such patterns are the ones who
important new light on the basic
nature of opportunity recognition.
then become highly successful entrepreneurs.
We should hasten to add that the case method, by itself, does not in any
sense prove that this is so. Findings obtained through the case method are
often highly valuable and can offer useful insights into how complex processes
occur. But since they often rely on somewhat informal means and on the
judgment and intuition of researchers, they provide a different kind of
knowledge than systematic observation or another method we will now
describe—experimentation.
In essence, experimentation involves systematically changing one variable
in order to see whether such changes affect one or more other variables. Note
that this approach involves active interventions by the researcher; in
systematic observation, in contrast, the researcher merely observes the
variables of interest without attempting to change them. Similarly, in the
case method, a researcher observes the people or companies of interest and
makes no attempt to change them in any way.
Experimentation: Knowledge Through Intervention

When it is conducted carefully, and in accordance with certain basic rules,
experimentation is a powerful tool. The reasoning behind it is impeccable: If
we change one variable while holding everything else constant, and these
changes affect another variable, we can conclude that changes in the first cause
changes in the second. Can this method actually be used to study
entrepreneurship? In many instances, not very readily, because researchers
simply cannot change many variables that are of interest to them. For instance,
they cannot alter government policies or demographic trends, or change
amount of capital available in economic markets. But in some contexts—
especially in research relating to the behavior of individual entrepreneurs—it
is possible to use experimentation. For example, consider, again, the possibility
that recognizing opportunities involves ‘‘connecting the dots’’ between
seemingly unrelated events or trends so that meaningful patterns emerge
and point to ideas for new products or services. This suggestion could be
studied by experimentation. For instance, one group of individuals could be
given training in recognizing patterns—that is, they would be trained in
techniques that help in searching for and noticing patterns in complex events
or trends. Another group, carefully matched to the first in as many respects as
possible (e.g., education, age, work experience), would not receive such
training. Then, both groups would be asked to read materials carefully
designed to contain information that can be
combined into patterns pointing to new business
opportunities. For instance, these materials could 8
be based on new ventures that actually developed Individuals Given Training Do Better
in the past, but about which the participants in in Recognizing Opportunities 7
7
the study do not know. If recognizing patterns
Success in Recognizing Opportunities
does indeed play a role in identifying opportu-

6
nities, then the individuals given training in
pattern recognition would be more successful at
5
this task than those not given such training (see
Figure 1.12).
4
We realize that this scenario may seem very
far removed from the chaotic, ever-changing 3
3
world in which entrepreneurs normally operate.
However, the purpose of experimentation is not
2
to simulate or reproduce these conditions; rather,
it is to gain insights into the nature of complex
processes such as opportunity recognition— 1
insights that cannot readily be gained through
the case method or systematic observation. 0
No Training Training
Experimentation offers one additional impor-
Training in Recognizing Patterns
tant advantage: It is useful for establishing
causality. When changing one variable in an
experiment produces changes in another, it provides strong evidence that Figure 1 . 12
the first variable caused changes in the second. In the experiment we just
Experimentation in
described, differences in the performance of the two groups (one with training
Entrepreneurship Research:
in pattern recognition and the other without such training) would point clearly
an Example
to the potential role of ‘‘connecting the dots’’ in opportunity recognition.
In the study illustrated here, one
Moreover, this evidence would be stronger and more conclusive than that group of participants was given
obtained by other methods. training in recognizing patterns
Because of practical constraints (e.g., it is difficult to vary the factors of while the other was not. When
interest systematically), experimentation is not often used in the study of both groups then read materials
entrepreneurship. Instead, researchers employ a wide range of statistical containing potential opportunities
techniques to help determine causality on the basis of other methods, such as for new ventures, the group given
systematic observation. One approach is to determine whether one variable or training was more successful in
recognizing these opportunities.
change occurs before another. Something that occurs later in time cannot This research suggests that
reasonably be the cause of something that occurred earlier. This concept, called recognizing patterns in complex
Granger causality, can be used to establish the direction of causality in trends and changes may indeed
systematic observation. So, for instance, suppose that research findings play an important role in
indicate that the more varied individuals’ work experience, the more opportunity recognition.
opportunities they later recognize. Because work experience precedes

recognizing opportunities, it makes sense to conclude that the experience
produced (caused) opportunity recognition. The opposite—that discovering
opportunities produces varied work experience—makes little or no sense.
In sum, there are several different methods for gathering useful—and
accurate—information about various aspects of entrepreneurship. None are
perfect, but it is our strong conviction that all are very useful, and are greatly
superior to the kind of informal, ‘‘shoot from the hip’’ approach taken in many
popular books on entrepreneurship. Don’t misunderstand: We do not mean to
imply that the people writing such books are ill-intentioned or totally lacking
in useful insights about the entrepreneurial process. Rather, we only wish to
note that the information they communicate is based almost entirely on their
own experience and other informal sources. Although these sources may
sometimes provide important insights, they rest on less certain (i.e., reliable)
foundations than information gathered through the use of systematic observa-
tion, experimentation, or the case method. For that reason, we will emphasize
information gathered through those methods throughout this book.
Theory: Answering the Questions ‘‘Why?’’ and ‘‘How?’’

We need to mention one more aspect of the quest for knowledge about
entrepreneurship before concluding: the role of theory in this endeavor. The
term theory has a special meaning in the realm of science. It refers to efforts
to go beyond merely describing various phenomena to the point at which we
can explain them—understanding why and how they happen or take place as
they do. For instance, with respect to opportunity recognition, we don’t want
merely to be able to state that some people are better at recognizing
opportunities than others or to report the percent of people who are highly
skilled at this task: We want to be able to explain why they are better and how
they go about recognizing these opportunities. In other words, we want to
know just what it is about certain people that allows them to be so good at
recognizing opportunities, especially, perhaps, ones that other people miss. As
we noted earlier, one such theory might involve the ability to perceive
meaningful patterns in diverse trends and events.
In sum, theories are frameworks for explaining various events or
processes. Given the fact that the field of entrepreneurship has been in
existence for only a relatively short period of time, it is not surprising to learn
that it has few well-developed theories of its own; in fact, it has sometimes
been criticized for lacking such frameworks.41 Up to this point in time,
entrepreneurship has largely borrowed theories from other fields, such as
economics, psychology, and cognitive science. For instance, efforts have
recently been made to apply prospect theory, a well-developed theory of
decision making,42 to several important issues relating to entrepreneurship
(e.g., the question of how entrepreneurs perceive risk)43 to answering the
question above. On the other hand, there is a growing body of theory
developed specifically to help explain various aspects of the entrepreneurial
process. For instance, one theory designed to explain why some family-owned
businesses are more successful than others, calls attention to the joint effects of
several factors, such as pay incentives for family members, their belief that the
firm will or will not be sold, and the extent to which family members know the
share of the business they will inherit. Offering family members pay incentives
(e.g., year-end cash bonuses) is quite common, but whether, and to what
extent, doing so contributes to the company’s success is not yet clear. The
theory just mentioned suggests that pay incentives for family members will
enhance firm performance when these persons believe the business will be
sold but will not enhance performance when they believe the company will
remain in the family. Why? Perhaps because when they believe the firm will be
sold, their feelings of commitment toward the family business are reduced,
thus allowing greater latitude for the impact of economic factors such as pay
incentives.44 In situations like this, we say that the effects of one variable are
moderated by another variable. In this case, the effects of pay incentives are
strong when family members expect the business to remain with the family,
but are weak when they expect that the business will be sold. In other words,
the effects of pay incentives are moderated (changed, affected) by expectations
about ownership of the business. We will encounter many instances in this
book when one variable moderates the effects of another; that’s why we
introduce this concept here.
As you can see, theories are extremely useful because they help explain
why certain events or processes occur as they do. For instance, as the
preceding example suggests, why pay incentives improve the performance of
family businesses under some circumstances but not under others. So, how
are theories derived in the first place? Briefly, the process goes something like
the following:
1. On the basis of existing evidence or observations, a theory reflecting the
evidence is proposed.
2. The theory, which consists of basic concepts and statements about how
these concepts are related, helps to organize existing information and
makes predictions about observable events. For instance, the theory might
predict the conditions under which individuals recognize or do not
recognize opportunities.
3. These predictions, known as hypotheses, are then tested by actual research.
4. If results are consistent with the theory, confidence in its accuracy is
increased. If they are not, the theory is modified and further tests are
conducted.
5. Ultimately, the theory is either accepted as accurate or rejected as
inaccurate. Even if it is accepted as accurate, however, the theory remains
open to further refinement as improved methods of research are
developed and additional evidence relevant to the theory’s predictions
is obtained. (Please see Figure 1.13 for a summary of these steps.)
Perhaps another concrete example will help clarify the importance of
theory. Suppose that on the basis of careful observations and existing findings,
an entrepreneurship researcher formulates the following theory: Individuals
Figure 1 . 13
Confidence in The Role of Theory in
Predictions are the theory
confirmed Entrepreneurship Research
is increased
Theories both organize existing
knowledge and make predictions
about how various events or
Theory about Predictions are Research designed Additional research processes will occur. Once theories
some aspect of derived from to test these designed to test other are formulated, hypotheses
entrepreneurship this theory predictions is predictions based on the derived logically from them are
conducted theory is conducted
tested through careful research. If
results agree with predictions,
confidence in the theory is
Predictions are Confidence in increased. If results disagree with
disconfirmed theory is reduced such predictions, the theory may
be modified or ultimately rejected
as false. Even if initial predictions
Theory is are confirmed, further tests of the
modified
theory are generally required.
Theory is
rejected
who choose to become entrepreneurs think differently, in various ways, from

people who do not choose this role.45 Specifically, individuals who choose to
become entrepreneurs are (1) more likely than others to be susceptible to several
kinds of cognitive errors or biases (e.g., they are more likely to be overly
optimistic and to suffer from the illusion of control—they overestimate their
ability to control the outcomes they experience, etc.), and (2) more likely than
others to think about situations in terms of the gains they will give up if they do
not launch a new venture, which, in turn, causes them to be more accepting of
risk. These predictions are then formulated as specific hypotheses and tested in
actual research. For instance, actual or would-be entrepreneurs could be
compared with people who have no interest in starting new ventures in terms of
their susceptibility to cognitive errors and their tendency to think about various
situations in terms of losses. Measures of all these variables already exist and
have been used in previous studies, so designing research to test these
hypotheses is quite feasible. If results are consistent with predictions derived
from the theory, confidence in it is increased: there would be a stronger basis for
accepting the theory’s premise that entrepreneurs do indeed think differently
from other people. On the other hand, if results are not consistent with
predictions derived from the theory, confidence in it is reduced.
Why should the field of entrepreneurship, which is eminently practical in
orientation, be interested in theory? Because, as one social scientist remarked
many years ago, ‘‘There is nothing as practical as a good theory.’’46 By this
statement he meant that having a good theory—a clear understanding of why
or how a process occurs as it does—is very useful from the point of view of
intervening in it in beneficial ways. In other words, if we have good and well-
verified theories about entrepreneurship, we will understand this process in
ways that enhance our ability to assist entrepreneurs in their efforts to start
new ventures. And that, of course, would be a very positive outcome. In short,
developing good theories is more than an exercise in basic science: It is an
important step toward attaining valuable, practical results.
Two final points: First, theories are never proven in any ultimate sense.
Rather, they are always open to testing and are accepted with more or less
confidence depending on the weight of available evidence relating to them.
Second, research should never be undertaken to prove or verify a theory; it is
performed to gather evidence relating to the theory. If a researcher sets out to
prove her or his pet theory, the researcher commits a serious violation of the
methods that should be followed to gather accurate information about any
topic. Why? Because in this case, the researcher may lose objectivity, and either
unconsciously (or even consciously) design her or his research so that it tips
the balance in favor of the theory. Clearly, any results obtained under these
conditions are on shaky ground.
n Many potential sources of knowledge about specific individuals, and this information is
KEY entrepreneurship exist, but the most accurate then used to reach conclusions about what
POINTS and reliable knowledge is provided by meth- factors influenced important outcomes such
ods found to be useful for this purpose in as economic success.
other fields: systematic observation, experi- n Experimentation involves direct interventions:
mentation, and reflection. One variable is changed systematically in
n Systematic observation involves careful mea- order to determine whether such changes
surement of variables of interest in order to affect one or more additional variables.
determine whether they are related (corre- n Theory involves efforts to explain rather than
lated) in any orderly manner. To the extent they merely describe various phenomena—to
are, one can be predicted from the other. understand why and how they occur.
n In the case method, large amounts of infor- Research is conducted to obtain data relevant
mation are gathered about one organization or to theories—not to prove them.
A User’s Guide to This Text

Although it is many years since we were students, we both remember the
following fact well: Not all textbooks are equally useful or easy to read. Some
were a pleasure to use, while others quite literally hurt our heads! Recalling
these experiences, we have done our best to make this book one of the good
ones. Here is an overview of the steps we have taken to reach this goal.
First, we have included many reader aids. Each chapter begins with a list of
key learning objectives: what you should know after you finish reading it. Within
the text itself, important terms are printed in boldface type and are followed
by a definition. These terms are also defined in a glossary at the end of each
chapter. To help you retain what you read, each major section is followed by a
list of key points—a brief summary of major points covered in that section. All
figures and tables are clear and simple, and most contain special labels and notes
designed to help you understand them (see Figure 1.11 for an example). Finally,
each chapter ends with a summary and review of the key points. Reviewing this
section can help you retain the information presented and help you to benefit
more from this course.
Second, the text contains three special features designed to make it more
useful—and interesting. One is labeled Danger! Pitfall Ahead! These sections,
which appear within each chapter rather than at the end, highlight potential
snares and hazards of which entrepreneurs should be aware—ones that can
prove fatal to their new ventures, and their dreams. Having been there
ourselves, we are only too aware of these pitfalls, and think it is crucial that we
call them clearly to your attention.
The second special feature is labeled Qualifying Common Sense: What We
Think We Know About Entrepreneurship . . . And What We Really Do Know.
These special sections provide vivid illustrations of the fact that, often,
commonsense ideas about entrepreneurship are misleading. In addition, they
indicate how careful research has helped to correct or clarify many of these
misconceptions. After reading these sections, you will have a much clearer
understanding of why we can’t trust intuition or informal knowledge to
provide the full understanding of the entrepreneurial process we seek.
Each chapter is followed by one or more brief cases and by experiential
exercises labeled Getting Down to Business. As this title suggests, these
exercises are designed to provide you with practice in using the information
presented earlier in the chapter. Finally, it’s important to note that the chapters
follow the timeline presented earlier in this chapter (refer to Figure 1.7). Thus,
Part 1 (Chapters 1, 2, and 3) examines the field of entrepreneurship and what
is, perhaps, the start of the entire process: emergence and recognition of
opportunities. Part 2 (Chapters 4–7) focuses on assembly of the resources
needed to launch a new venture: information, financial, and people resources.
Part 3 (Chapters 8–10) examines the actual launch of new ventures,
considering such topics as the legal form of such ventures and strategy for
success. Part 4 (Chapter 11–12) focuses on key aspects of growth—issues
relating to strategies for encouraging growth and management techniques and
procedures useful in obtaining it through effective management techniques
(e.g., attracting, motivating, and retaining top-notch employees). Finally,
Part 5 (Chapter 13) focuses on the logical conclusion to the entrepreneurial
process: alternative ways in which entrepreneurs can harvest the rewards
of their efforts. In addition, the text ends with a unit on accounting for
entrepreneurs. This module reviews key principles essential to entrepreneurs
in running a new venture.
One last word: As authors and teachers, we promise faithfully that we will
not lose sight of our major goals in writing this book: providing you with an
accurate and up-to-date overview of what we currently know about
Figure 1 . 14
Entrepreneurs: Key Contributors
to Society
Entrepreneurs do not merely add
to their own personal fortunes;
they often also improve the lives
of millions through the new
products and services they bring
to market. Moreover, they often
make generous donations to
worthy causes. For instance, the
breathtakingly beautiful Getty
ß Robert Landau/CORBIS
Museum, located outside Los
Angeles, was funded by a gift of
several billion dollars from the
John Paul Getty Foundation.
entrepreneurship as a process. In closing, we wish to add that we agree with

the English author Lady Mary Montagu who, in writing about personal
wealth, once remarked: ‘‘ ’Tis a sort of duty to be rich, that it may be in one’s power
to do good. . . . ’’ We believe that successful entrepreneurs do indeed ‘‘do good’’:
true, they add to their own wealth. But in addition, they do much more: The
products and services they bring into being improve the lives of countless
millions of people; and on top of this, they are often extremely generous in
donating substantial portions of their wealth to eminently worthy causes. For
instance, a few years ago, one of us (Baron) visited the beautiful art museum in
Los Angeles funded by the John Paul Getty Foundation (see Figure 1.14). What
a gift to all humanity! And both of us work in Schools of Management that are
named after the entrepreneurs who made generous donations to support them
and the universities in which they are located. If this book helps emerging
entrepreneurs to succeed in attaining their dreams—and therefore enhances
their ability ‘‘to do good’’ with the wealth they acquire—we will feel that as
authors, we have done our part.
SUMMARY
n Entrepreneurship, as a field of business, individuals) and the macro perspective
& REVIEW seeks to understand how opportunities to (which focuses primarily on environmental
OF KEY create new products or services arise and factors) are important for obtaining a full
POINTS are discovered or created by specific understanding of the entrepreneurial
individuals, who then use various means process.
to exploit or develop them, thus produc- n This book will not simply describe what
ing a wide range of effects. entrepreneurs do (common practice); it
n In recent years, the allure of entrepreneur- will go further and describe actions and
ship has increased, with the result that procedures entrepreneurs can perform to
more people than ever before are choos- increase the likelihood that their compa-
ing this activity as a career. nies will succeed.
n Entrepreneurship, as a branch of busi- n Entrepreneurship is a process that un-
ness, has important roots in economics, folds over time and moves through dis-
behavioral science, and sociology. tinct but closely interrelated phases.
n The field of entrepreneurship recognizes n The entrepreneurial process cannot be
that both the micro perspective (which divided into neat and easily distinguished
focuses on the behavior and thoughts of phases, but in general, it involves generation
of an idea for a new product or service and/or indicate that entrepreneurs do indeed think differently
recognition of an opportunity, assembling the resources from other people in several respects, and that their
needed to launch a new venture, launching the venture, cognitive processes often play a key role in the
running and growing the business, and harvesting founding and success of new ventures.
the rewards. n Many potential sources of knowledge about entre-
n Individual, group, and societal factors influence all preneurship exist, but the most accurate and reliable
phases of the entrepreneurial process. Thus, instead knowledge is provided by methods found to be useful
of choosing between a ‘‘micro’’ and a ‘‘macro’’ for this purpose in other fields: systematic observa-
approach to entrepreneurship, both perspectives tion, experimentation, and reflection.
are necessary. n Systematic observation involves careful measurement
n It is the nexus of valuable opportunities and enterpris- of variables of interest in order to determine whether
ing individuals that is the essence of entrepreneurship. they are related (correlated) in any orderly manner. To
n The field of entrepreneurship is broad in scope and the extent they are, one can be predicted from the
reflects the wide range of factors that affect the other.
founding and success of new ventures. n In the case method, large amounts of information are
n One topic receiving a great deal of current attention gathered about one organization or specific individ-
is university-based technology transfer—the ways in uals, and this information is then used to reach
which universities sometimes encourage entrepre- conclusions about what factors influenced important
neurial activities by faculty members and others. outcomes such as economic success.
n Another, and closely related topic, is the role of n Experimentation involves direct interventions: One
incubators and science parks—organizations that variable is changed systematically in order to deter-
seek to encourage economic development in a region mine whether such changes affect one or more
by encouraging the sharing of knowledge. Incubators additional variables.
are associated with universities, while science parks n Theory involves efforts to explain rather than merely
may be entirely independent. describe various phenomena—to understand why and
n Recent research has also attempted to understand how they occur. Research is conducted to obtain
the ways in which entrepreneurs think, reason, and data relevant to theories—not to prove them.
make decisions: entrepreneurial cognition. Findings
Glossary
Business Plan: A detailed description of the entrepre- economic, financial, political) that are largely beyond
neur’s vision for converting ideas into a profitable, the direct control of an individual.
going business. Micro (Perspective): A ‘‘bottom-up’’ perspective that seeks
Case Method: A research method in which large amounts to understand the entrepreneurial process by focusing
of data about one organization or specific individuals on the behavior and thought of individuals or
are gathered and then used to reach conclusions groups of individuals (e.g., founding partners).
about what factors influenced important outcomes, Opportunity: The potential to create something
such as economic success. new (new products or services, new markets, new
Experimentation: A research method in which one production processes, new raw materials, new
variable is systematically changed in order to deter- ways of organizing existing technologies, etc.) that
mine whether such changes affect one or more emerges from a complex pattern of changing
other variables. conditions—changes in knowledge, technology,
Hypothesis: An as-yet untested prediction or explana- economic, political, social, and demographic
tion for a set of facts. conditions.
Intrapreneurs: Individuals who create something new, Systematic Observation: A research method in which
but inside an existing company rather than through certain aspects of the world are observed system-
founding a new venture. atically and careful records kept of what is
Macro (Perspective): A ‘‘top-down’’ perspective that detected. This information is then used as a basis
seeks to understand the entrepreneurial process for reaching conclusions about the topics under
by focusing largely on environmental factors (i.e., investigation.
Technology Transfer Offices: Departments at univer- Theory: Refers to effort to go beyond merely describing
sities charged with the task of helping to move various phenomena and, instead, to explain them.
scientific and technological discoveries by faculty Variables: Aspects of the world that can take different
from the laboratory to the marketplace. values.
Questions for Discussion

1. What is the difference between an inventor and an heroic? If you think this suggestion is not accu-
entrepreneur? rate, why?
2. Suppose that the government passed a series of 5. Do you think that universities should own
laws that made it much more difficult to start a patents for inventions or scientific advances
new business. What effect(s) do you think such made by faculty members? Why or why not?
laws would have on the economy? 6. Suppose you came across an article in a magazine
3. One basic question in the field of entrepreneur- with the following title: ‘‘First-Borns Make the
ship is: ‘‘Why do some people leave secure jobs Best Entrepreneurs.’’ Reading the article, you
and lives to become entrepreneurs?’’ How would discover that it contends that entrepreneurs who
you study this issue from the micro perspective? are the oldest child in their family are more
From the macro perspective? successful than ones who are the second or third
4. In this chapter, we suggested that entrepreneurs born. What questions should you ask yourself
are the new heroes and heroines in many about how this information was obtained in order
cultures. Do you think they are? If so, why do to decide whether to view it as accurate or valid?
so many people see entrepreneurs as being
Getting Down
TO BUSINESS
Becoming an Entrepreneur: Is It Right 1. Can you handle uncertainty? Is security (e.g., a

for You? regular paycheck) important to you, or are you
A key theme of this chapter is that the entrepreneurial willing to live with uncertainty—economic and
process begins when enterprising individuals identify otherwise?
potentially valuable opportunities. Clearly, this im- 2. Are you energetic? Do you have the vigor and
plies that not everyone is suited to becoming an good health required to work long hours for long
entrepreneur. Just being able to spot potentially periods of time in order to reach goals that are
profitable opportunities is not, in itself, enough. In important to you?
addition, entrepreneurs must be willing, ready, and 3. Do you believe in yourself and your abilities?
able to ‘‘run with the ball’’—to take the vigorous and Do you believe that you can accomplish whatever
continuing steps necessary to launch a new venture. you set out to accomplish, learning what you
Are you such a person? Are you capable not only of need along the way?
developing a vision of where you want to get, but also
4. Can you handle reversals and failures well?
of getting there? If not, you should reconsider,
How do you react to negative outcomes—with
because entrepreneurship definitely lives up to
discouragement, or with renewed commitment to
Edison’s suggestion that ‘‘Success is 2% inspiration
succeeding the next time around and learning
and 98% perspiration.’’
from your mistakes?
Even though no single test of ‘‘entrepreneurial
potential’’47 is available, becoming a successful entre- 5. Are you passionate about your goals and vision?
preneur requires several key characteristics. Rate Once you establish a goal or a vision of where
yourself on each of these dimensions—and then ask you want to be, are you willing to sacrifice almost
several people who know you well to do the same everything else to get there, because you are truly
thing. The results may give you valuable insight into passionate about doing so?
whether you are cut out to be an entrepreneur.
6. Are you good with other people? Can you other people.48 They can handle uncertainty, are
persuade them to see the world the way you energetic, believe in themselves, react well and flex-
do? Can you get along with them well (e.g., ibly to reversals, are passionate about their beliefs, are
handle conflicts, build trust)? good with other people, are highly adaptable, and are
7. Are you adaptable? Can you make ‘‘midcourse cor- willing to accept reasonable levels of risk. To the
rections’’ easily? For instance, can you admit that extent you possess these characteristics—or a least
you made a mistake and reverse course to correct it? most of them—you may be well-suited for the role of
entrepreneur. We suspect that if you are reading this
8. Are you willing to take risks or leaps of faith?
book, you fit this description, or you would not be in
Once you establish a goal, are you willing to
this course! But if you find that you are relatively low
take reasonable risks to reach it? In other words,
on several of these characteristics, you might want to
are you willing to do what you can to minimize the
reconsider; perhaps becoming an entrepreneur is not
risks, but then, once you have done so, proceed?
really your particular ‘‘cup of tea.’’
Current evidence suggests that successful entrepre-
neurs are high on all these dimensions—higher than
Answering Questions About each, try to specify clearly the variables you would
Entrepreneurship: Practice in Thinking study and the ways in which you would gather
Like a Researcher information about these variables. Also try to for-
In this chapter, we discussed various methods for mulate specific hypotheses about how your results
answering questions about entrepreneurship in ways will turn out. Finally, consider the implications for
that yield information that is both reliable and entrepreneurs if your findings confirm, or do not
accurate. Although we certainly don’t expect you to confirm, you initial hypothesis.
become an expert in using these methods (that takes 1. Do companies that are first to market with a new
years of study and practice), we think it is important product have a competitive edge over companies
for you to understand how they work because if you that enter the same market later?
do, you will become an informed consumer of
2. Do repeat entrepreneurs (people who start one
knowledge about entrepreneurship. In other words,
successful company after another) search for
you’ll be able to tell what information is useful to you,
opportunities differently from entrepreneurs
and what is purely conjecture—or worse!
who found only one company?
To gain practice in using these methods, try the
following exercise. Consider the following questions 3. What factors lead individuals to give up secure
and for each, describe how you might go about and well-paid jobs to become entrepreneurs? Are
answering it through use of (1) systematic observa- these factors the same for women and men?
tion, (2) the case method, or (3) experimentation. For
case one
Entrepreneurship: A Field, an Activity, and a Way of Life
In 1996, Mario Morino launched the ‘‘Netpreneur’’ company then executed a merger to form Legent
program, aimed at fostering high-tech, Internet-related Corporation, which was in turn acquired in 1995 by IT
entrepreneurship in the greater Washington, D.C., giant Computer Associates for $1.7 billion, with Morino’s
region, and to provide a ‘‘learning community for share of the deal some $80 million.
entrepreneurs and their stakeholders.’’ The Washington, D.C., area is a major metropolitan
Morino was himself a successful entrepreneur, hav- center and, as home to the federal government, globally
ing taken an initial $600 investment in Morino Associates, known. Those elements do not make it a hub of
founded in 1973 to develop software for mainframe entrepreneurism, however. When Morino launched his
computers, all the way to an initial public offering. The program, D.C. lagged far behind the Silicon Valley region,
Boston, and other urban centers as a locus for otherwise facilitate a number of successful entrepreneu-
entrepreneurial IT innovation. rial ventures.
Arguably, the region’s major businesses—govern- D.C. ‘‘netpreneur’’ Trevor Cornwell founded Skyjet in
ment, major nonprofits such as federally chartered mort- 1997 to serve as an aggregator for the highly fragmented
gage lender Fannie Mae, traditional telecommunications market for charter jets. Corporate jets are expensive to
companies—aren’t the sort to draw the entrepreneurial- own and operate, and sit idle a good deal of the time.
minded. The one major dot-com in the region at the time, Cornwell’s innovation was to provide a means for jet
America Online, employed far more administrative work- owners to advertise the availability of those jets to other
ers than high-tech inventors (compared to Silicon Valley’s corporations and individuals needing the flexibility
Google, which scours the market for technology Ph.D.s, afforded by an executive jet, but unwilling to bear the
needed to engineer its high-tech search services). full cost of one of their own. Here the contribution of the
Even so, many nascent—and in some cases, Internet was to facilitate an inexpensive platform for
accomplished—entrepreneurs worked in the area, and fielding inquiries and registering notices of availability.
Morino’s program gave them a means to meet, learn, and Cornwell sold his company to publicly traded Canadian
leverage each other’s resources. The program staged aircraft manufacturer Bombardier in 2000.
regular ‘‘Coffee and Doughnets’’ mixers, with local and Raj Khera became an entrepreneur after a career at
national entrepreneurs as speakers, for face-to-face (or, in the National Institute of Standards and Technology, an
Internet parlance, ‘‘f2f’’) interactions, and established a arm of the Department of Commerce, as an electrical
Web site (http://www.netpreneur.org) and mailing lists. engineer and technology transfer specialist. Forming
Over the course of the program, the Netpreneur e-mail Khera Communications with his brother, he turned his
newsletter grew from 35 subscribers to more than 12,000. knowledge of working with the government into the
The Netpreneur program wasn’t the only, nor even development of GovCon.com, a business portal for
the first, effort in the area to promote entrepreneuring, government contractors, which was ultimately sold to
though it was the first to focus on the Internet, and to VerticalNet, which specialized in portals for vertical
broadly target ‘‘newbies’’ to the field. Organizations such markets.
as the Mid-Atlantic Venture Association (MAVA), formed For every success, more than a few less-than-
a decade before Morino chartered Netpreneurs, were successful efforts were made, from start-ups that never
working to introduce entrepreneurs to sources of capital, quite gelled, to companies that successfully sought seed
and to strategic partners and relevant service providers. capital and even institutional rounds of venture funding, but
According to its Web site, MAVA offers the following: went bankrupt. Susan DeFife, for example, created
n Facilitates the flow of capital by creating opportu- WomenConnect.com as a site for women professionals,
nities for membership interaction and investment. launching it from the sunroom of her suburban home, and
growing to a staff of 25, while securing some $5.5 million
n Hosts an annual venture fair, which showcases
in venture funding. WomenConnect.com declared bank-
premier companies for private equity investment
ruptcy in 2000, when the dot-com bubble’s burst took
opportunities.
down a great many start-ups. DeFife has moved on; she’s
n Provides members with additional opportunities for
now one of the team at the helm of Backfence, a new
deal flow and interaction during numerous annual
service to create geographically local Web-based
luncheons, topical programming receptions, and
communities.
other events featuring speakers and/or business
At the end of 2002, Morino himself moved on,
discussions regarding entrepreneurial concerns,
redirecting the efforts of the Morino Institute toward
investment trends, company financing, tax matters,
venture philanthropy and helping children of low-income
IPOs and public policy issues.
families in the D.C. region. He handed off the Netpreneur
The Netpreneur program casts a far wider net, and program to a new team that pledged to keep it alive and
helped prospective entrepreneurs take the initial first fostering entrepreneurial development. The Washington,
steps toward forums like MAVA. D.C., economy, meanwhile, is booming as a result of
Even though the D.C. area most clearly wasn’t increased government spending, especially in the
Silicon Valley, Netpreneur and other area venture- defense and intelligence communities, for homeland
oriented forums and groups did spawn, inspire, or security, and for the war on terror.
Questions
1. The Morino Netpreneur program sought to create a 3. How might D.C.’s current booming economy affect
‘‘learning community for entrepreneurs and their its entrepreneurial community?
stakeholders.’’ It’s pretty clear who entrepreneurs
are, but who are their stakeholders?
2. What sort of entrepreneurial ventures would you
expect to come out of the ‘‘Netpreneurial’’ commu-
nity located in the Washington, D.C., area?
Notes
1 Shane, S., & Venkataraman, S. (2000). The promise of 15 Baron, R.A., & Markman, G.D. (2005). Toward a process
entrepreneurship as a field of research. Academy of view of entrepreneurship: The changing impact of
Management Review, 25, 217–226. individual level variables across phases of new venture
2 Sarason, Y., Dean, T., & Dillard, F. (2006). Entrepreneur- development. In M.A., Rahim, R.T., Golembiewski,
ship as the nexus of individual and opportunity: A R.T., & K.D. Mackenzie (Eds.), Current Topics in
structuration view. Journal of Business Venturing, 21, Management, vol. 9. New Brunswick, NJ: Transaction
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3 McMullen, J.S., & Shepherd, D.A. (2006). Entrepreneurial 16 Ardichvilli, A., Cardozo, R., & Ray, S. (2003). A theory of
action and the role of uncertainty in the theory of the entrepreneurial opportunity identification and develop-
entrepreneurs. Academy of Management Review, 31, 132– ment. Journal of Business Venturing, 18, 105–124.
152. 17 Hagenbaugh, B. (2004). Couple says celebrate second trip
4 Sarasvathy, S.D. (2004). The questions we ask and the down the aisle. USA Today, August 9, 7B.
question we care about: Reformulating some problems in 18 Shane, S., Locke, E.A., & Collins, C.J. (2003). Entrepre-
entrepreneurship research. Journal of Business Venturing, neurial motivation. Human Resource Management Review,
2004, 19, 707–717. 13, 257–280.
5 Lumpkin, G.T. (In press). Intrapreneurship and innova- 19 Gartner, W.B. (1990). What are we talking about when
tion. In R. Baum, M. Frese, and F. Baron (Eds.), The we talk about entrepreneurship? Journal of Business
Psychology of Entrepreneurship. Mahwah, NJ: Erlbaum. Venturing, 5, 15–28; Verheul, I., Uhlaner, L., & Thurik,
6 Ricchiuto, J. (1997). Collaborative Creativity. New York: R. (2005). Business accomplishments, gender, and
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attainment among corporate entrepreneurs: Executive 20 Stewart, W.H., Jr., & Roth, P.L. (2001). Risk taking
champion versus team commitment. Paper presented at propensity differences between entrepreneurs man-
the Babson-Kaufman Entrepreneurship Research Con- agers: A meta-analytic review. Journal of Applied Psychol-
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8 Rauch, A., Wiklund, J., Frese, M., & Lumpkin, G.T. 21 Miner, J.B., & Raju, N.S. (2004). When science divests
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at 2004 Babson Kauffman Entrepreneurship Research agers. Journal of Applied Psychology, 89, 3–13.
Conference, Wellesley, MA. 22 See note 15.
9 Dunn & Bradstreet (1999). 23 Nicolaou, N., & Shane, S. (2006). Born entrepreneurs?
10 O’Reilly, B. (1994). The new deal: What companies and The genetic foundations of entrepreneurship. Unpub-
employees owe each other. Fortune, June 13, 44–47, 50, 52. lished manuscript under review, Tanaka Business
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Organizations, 9th ed. Upper Saddle River, NJ: Prentice- Journal of Business Venturing.
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13 See note 4. mediating role of self-efficacy in the development of
14 Bhide, A.V. (2000). The Origin and Evolution of New entrepreneurial intentions. Journal of Applied Psychology,
Businesses. Oxford: University Press. 90, 1265–1271.
26 Markman, G.D., Balkin, D.B., & Baron, R.A. (2002). 38 Baron, R.A., & Ensley, M.D. (Under review). Opportu-
Inventors and new venture formation: The effects of nity recognition as the detection of meaningful patterns:
general self-efficacy and regretful thinking. Entrepreneur- Evidence from the prototypes of novice and experienced
ship Theory & Practice, 20, 149–165. entrepreneurs.
27 White, R.E., Thornhill, S., & Hampson, E. (2005). 39 Baron, R.A. (2006). Opportunity recognition as pattern
Entrepreneurs and evolutionary biology: The relation- recognition: How entrepreneurs ‘‘connect the dots’’ to
ship between testosterone and new venture creation. identify new business opportunities. Academy of Manage-
Paper currently under review. ment Executive.
28 See note 23. 40 Evans, D., & Leighton, L. (1989). Some empirical aspects
29 Baum, R., & Locke, E. (2004). The relationship of of entrepreneurship. American Economic Review, 9, 519–
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venture growth. Journal of Applied Psychology, 89, 587–598. 41 See note 1.
30 See note 23. 42 Plous, S. (1993). The Psychology of Judgment and Decision
31 Shane, S. (2004). Encouraging university entrepreneur- Making. New York: McGraw-Hill.
ship? The effect of the Bayh-Dole Act on university 43 See note 20.
patenting in the United States. Journal of Business 44 Schultze, W.S., Lubatkin, M.H., & Dino, R.N. (2003).
Venturing, 19, 127–151. Toward a theory of agency and altruism in family firms.
32 Powers, J.P., & McDougall, P.P. (2005). University start- Journal of Business Venturing, 18, 473–490.
up formation and technology licensing with firms that 45 Krueger, N.F., Jr. (2003). The cognitive psychology of
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34 Markman, G.D., Phan, P.H., Balkin, D.B., & Gianoidis, 47 Chen, C.C., Green, P.G., & Crick, A. (1998). Does
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35 Mullins, J.W., & Forlani, D. (2005). Missing the boat or 48 Stewart, W.H., Jr., Watson, W.E., Carland, J.C., &
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making. Journal of Business Venturing, 20, 47–69. A comparison of entrepreneurs, small business owners,
36 Mitchell, R.K., Buseniz, L., Lant, T., McDougall, P.P., and corporate managers. Journal of Business Venturing,
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inclusive domain of entrepreneurial cognition research.
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37 Gaglio, C.M. (2004). The role of mental simulations and
counterfactual thinking in the opportunity identification
process. Entrepreneurship Theory and Practice, 28, Winter,
533–552.

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Entrepreneurship: A Process Perspective, 2nd Edition

VP/Editorial Director: Manager of Technology, Editorial: Cover and Internal Designer:

Publisher: Technology Project Manager: Cover Images:

Acquisitions Editor: Production Technology Analyst: Photography Manager:

Sr. Developmental Editor: Manufacturing Coordinator: Photo Researcher:

Marketing Manager: Production House: Printer:

Content Project Manager: Art Director:

1 Define entrepreneurship as a field of business.

2 Explain why the activities of entrepreneurs are so

3 Describe the process perspective of entrepre-

4 Explain why entrepreneurship can be viewed as

5 Understand why this text will both describe what

6 Describe several issues and questions about entre-

7 Explain why certain sources of knowledge about

8 Describe the nature of three basic means for obtaining

CHAPTER 1 Entrepreneurship: A Field, an Activity, and a Way of Life 3

Anyone who has invented a better mousetrap, or the contemporary equivalent,

other countries, wanted to drink more liquids because

Why do we start with these examples of what might be termed non-earth-

The Field of Entrepreneurship:

a definition offered by Shane and Venkataraman1 has received increasing accep-

Similarly, the downsized executive is using an existing ‘‘raw material’’—

Source: Universal Press Syndicate, September 4, 2001.

A Recent Extension and Clarification

Entrepreneurship: An Engine of Economic Growth

United States increased greatly.

ß Matt Stroshane/Bloomberg News/Landov

to become entrepreneurs use franchises as a means of attaining this dream; see

The Field of Entrepreneurship:

entrepreneurship—a field of study that seeks to understand how opportunities to

Copyright 2003 Expedia, Inc. All rights reserved.

understand the entrepreneurial process? This issue has sometimes been

What Entrepreneurs Do Versus What, Perhaps,

n Entrepreneurship, as a field of business, seeks n Entrepreneurship, as a branch of business,

older people in many societies seem increasingly willing to

Courtesy, Twice is Nice Encore Bridal Creations LLC

carefully among the many ways of reaping the benefits of successful

Levels of Analysis: Micro Versus Macro Revisited

Individual-Level Variables (skills, motives, characteristics of entrepreneurs)

All phases are influenced by

Figure 1 . 7 Entrepreneurship as a Process: Some Key Phases

hormone! Further evidence suggested that this difference stemmed from a

The Possible Role of Genetic and Other Biological Factors:

Group-Level and Societal-Level Factors Figure 1 . 8

The Cutting Edge: Emerging

University-Based Technology Transfer: How

Incubators and Science Parks:

Research is currently being conducted to deter-

Courtesy of Robert A. Baron

n The field of entrepreneurship is broad in economic development in a region by en-

Sources of Knowledge About

There are three principal means of acquiring knowledge: observation,

Observation, Reflection, and Experimentation:

The Case Method

educational settings, was clear. During the 1940s and 1950s,

Experimentation: Knowledge Through Intervention

does indeed play a role in identifying opportu-

opportunities they later recognize. Because work experience precedes

Theory: Answering the Questions ‘‘Why?’’ and ‘‘How?’’

who choose to become entrepreneurs think differently, in various ways, from

A User’s Guide to This Text