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1. What Do Entrepreneurs Do? Why Do They Do It?An entrepreneur creates, organizes, manages and assumes the risks of a new business. Synonyms for entrepreneur include: capitalist, magnate, mogul, tycoon. Entrepreneuring is the act of starting a new venture as an independent business.
"Innovating" is starting a new venture within an existing business firm. Synonyms for innovator include: originator, creator, developer. Entrepreneurs and innovators make something new happen. Perhaps, if the entrepreneur had not started the new business, someone else might have. Perhaps not.
While each new enterprise usually starts as a small business and often remains small, entrepreneuring, on a national scale is a very big and important business. In a typical year, small independent businesses created 2.6 million jobs, while large corporations eliminated 1.6 million jobs. Without entrepreneurs, our economy would decline.
Entrepreneurs are not motivated only by patriotism when they start their new ventures. According to what entrepreneurs say, they are motivated by desire to:
1. Be his or her own boss.
2. Become rich and famous.
3. Help partners, stockholders and employees to make a lot of money.
4. Prove something to a parent.
5. Use their skills.
6. Enjoy a sense of achievement.
7. Earn a living when jobs are not available.
Also, while this may not be the initial motivation, successful entrepreneurs often give large amounts of money, or stock to charitable organizations. Sometimes they even fund museums, or colleges or hospitals.
2. Personal Characteristics of Successful EntrepreneursResearch studies have discovered that successful entrepreneurs tend to have certain personal characteristics. Successful entrepreneurs . . .
1. Identify opportunities. When they see that someone has a problem, they perceive this as an opportunity to make a profit by supplying a product or service to solve the problem.
2. Act. Instead of waiting for things to happen, entrepreneurs make them happen.
3. Seek to improve. Entrepreneurs have contempt for "what is." They are constantly learning, experimenting, changing, improving.
4. Orient themselves to customers’ needs. They constantly ask: "What can we do for our customers today?"
5. Value their employees. They allow their employees to make decisions and to grow and reward them accordingly. They see to it that the most attractive option for all their employees is always to stay with the company and to help it grow.
6. Face reality. They plan thoroughly and balance their optimism with realistic appraisal of the risks they face.
7. Tolerate tedium. Much of starting and running a business is paying close attention to details. Entrepreneurs pay attention to the details.
8. Rebound from disappointments. Success in business takes time and overcoming many difficulties. Successful entrepreneurs stay the course. If they fail, they try again.
Not many people have all these qualities and quite a few entrepreneurs have made fortunes even if they did not always treat their employees with respect or tolerate tedium particularly well. The point is that these qualities are useful and it pays for you to develop them, if they are lacking.
3. How Entrepreneurs Get Good Ideas for New Ventures
Most of the time, entrepreneurs get their ideas from prior employment. They go into competition with their former employers or acquire a business that failed, possibly their employer’s business. There may be some legal issues in such a situation if the employee has a non-compete contract with the employer. On the other hand, employers cannot stop former employees from using their knowledge and skills to earn a living.
A second source of ideas is acquisition of rights from a business firm that is willing to license a process or product or from a non-profit organization that has developed a product and wants to keep its non-profit status.
Related to this approach is the possibility of franchising, which involves buying a complete business idea and training from the franchising corporation. Examples are all around us: MacDonald’s, Burger King, Midas Muffler, etc. This may be a fruitful approach, but you should be cautious. Horror stories have been published telling how unscrupulous promoters were more interested in collecting up-front fees than in helping the entrepreneur to succeed in business. Another possible drawback is that the best franchises usually require large investments. For ideas about franchises, read Entrepreneur magazine and see the newest edition of the book "The 220 Best Franchises to Buy," by Constance Jones, published by Bantam.
A third possibility is to team up with an inventor who wants to share the burden of starting up with someone who will handle the business end of the enterprise.
Other sources of new venture ideas include self-employment, hobbies and suggestions made by someone else.
The surprising finding of extensive research in the area of start-up ideas is that new venture ideas rarely come as a result of methodical search. This does not mean that methodical search is a bad strategy, it’s just that not many entrepreneurs have used it. Several examples cited in Karl Vesper’s book, New Venture Strategies, show that methodical search can lead to profitable new ventures:
One entrepreneur asked all his business acquaintances to inform him of all interesting new ideas they knew of. Eventually, he started a successful business and people kept bringing him interesting ideas. Presumably, he compensated the idea bringers.
Another entrepreneur asked marketing people in one industry what customers were asking for and had trouble getting. This also resulted in a successful business.
A third entrepreneur asked purchasing agents what they were having trouble buying. This approach also gave rise to a successful business. A surprising by-product of methodical searching for business ideas is a gain in creativity for the searcher, which also leads to profitable ideas for starting a new business.
4. What Do You Absolutely Need for Success?You need five ingredients for success:
1. An idea for a product or service that customers are willing to buy at a sufficiently high price to allow for a big margin above cost.
2. The ability to provide the product or service.
3. Personal contacts for acquiring information and other resources.
4. Money to keep the business going during the start-up phase.
5. Sufficient customer orders to cover all costs and expenses and to provide a profit.
Many entrepreneurs have tried to start businesses without giving enough attention to each of these requirements, and their businesses failed.
5. How to Increase the Odds in Your FavorFactors that influence the probability of success include: choice of industry, education and experience of the entrepreneur, formation of personal contacts and starting capitalization. Strategies that tend to lead to entrepreneurial success are discussed below.
1. Choose a growing industry, as opposed to one that is crowded with suppliers. Take advantage of major trends. For many years, we were in the era of "do-it-yourself." Now because of severe time pressures, many people are buying services that they used to provide for themselves, such as preparing food and taking care of children. To reduce employee costs, many businesses are contracting out for services: cleaning, food service, computer programming.
2. Get appropriate education and experience, as follows:
a) Get higher education. For high technology, your should have a college degree and graduate work. If your field is low-tech, some college work may suffice.
b) Get work experience in several functional areas, including marketing and finance and hands-on experience in production and selling.
c) Work for business firms in their start-up phase to get specific entrepreneurial experience. This experience should be in the same industry as your intended enterprise and should definitely include the activities that are characteristic of successful entrepreneuring: networking and negotiating.
3. Establish a wide net of contacts to help you with every phase of the start-up. Family and friends can help directly or lead to other connections that will be useful. Informal contacts will help you in selecting a location, raising capital, finding partners and key employees, obtaining permits and even finding customers for your product or service. Look for free advisory services provided by state governments, often in conjunction with business schools.
4. Make sure that you have enough capital at start-up, so that you do not run out of money before your business starts generating a positive cash flow. This requires excellent planning, which we will discuss again later.
5. Retain a lawyer and an accountant with extensive experience in business start-ups, preferably in your industry.
6. Establish reliable connections with vendors who will be supplying your materials.
6. Developing the New EnterpriseThe newness of the entrepreneurial business gives it competitive disadvantages. To succeed, it has to overcome buyers’ resistance to change and suspicion of strangers. This point is painfully dramatized by the Dun & Bradstreet finding that "inadequate sales" are the most frequent cause of business failure, being cited in nearly two fifths of the cases. Competitive weakness is second, involving one fifth of the cases and excessive operating expenses are third, accounting for one tenth of the cases of business failure.
Inadequate sales and competitive weakness are caused by two classes of problems: not delivering the exact product or service demanded by the market and inadequate marketing. Of course, operating expenses would not be excessive if sales volume generated enough cash to pay for these expenses. The conclusion is that all aspects of the business affect each other, and the entrepreneur is responsible for all of them.
The only way to manage the complex entrepreneurial task and to keep the risks at tolerable levels is to prepare and maintain a thorough business plan. You, the entrepreneur must prepare this plan, not a consultant because while the plan is important, the process of planning is more important.
Business planning must be a continuous activity done with the understanding that the business plan is not merely a tool for securing capital but that business planning is the indispensable organizing device of the new venture. Continuous business planning is the only way of reducing the unavoidable risk of any new venture. Business planning cannot be relegated to being a mere paper exercise. You must learn the structure of the business plan and relate every action to the plan. This is the only way to use scarce resources efficiently and to reduce risk to the lowest possible level.
Other strategies for insuring the success of the new venture are networking and effective time management.
You must network to secure a wide range of information. As entrepreneur, you are responsible for all aspects of the business throughout its infancy. Maximum risk coincides with minimum experience, a dangerous condition. The risk is inherent. Lack of knowledge can be reduced by networking. To make the most efficient use of your time now and after you start up your new venture, you must become a competent computer user.
If all of these hurdles have not discouraged you, here’s the biggest: prepare a business plan, using the "Business Plan Outline," at the end of this chapter. This is a long, detailed and demanding outline and filling in all the information may take quite a while. There are no shortcuts in entrepreneuring and if you want to give your business a fair chance of success, you really have to think through all the details and document them. The key issues are:
The MARKET. Who will buy your product (or service)? Why will they buy from you, instead of their present sources? How much will they buy? How much will they pay? How will you sell and advertise to motivate them to buy from you? How will you distribute the product or service to your customers?
The MONEY. How much will you sell each month for the first 36 months? How much revenue will that bring in? How much marketing expense will be required? What will be your costs and expenses (all your costs and expenses, including your living expenses) during each of the first 36 months? How much cash will you need above the amount generated by sales? At what point in time will you have the maximum cash demand? How much will that be? After you add a substantial percentage to cover forecasting errors, how much cash do you need to get your business to the point where cash inflow is greater than cash outflow? Do you have and are you willing to risk this much? Can you raise the money you need?
A possible source of money is "angels." They are successful entrepreneurs who are willing to risk money in a new venture if it promises a good return. Find rich people in your area and have an excellent business plan ready. This will take time and networking.
Venture clubs may also be helpful. Write to Bruce J. Blechman in care of Entrepreneur magazine, 2392 Morse Ave., Irvine, CA 92714 for a list of venture capital clubs and computer matchmaking networks in your area.
Another possible source for funds are governments. The largest sources are the Small Business Administration and the Department of Defense. There are many others, too numerous to list here. You may wish to consult a book by Mark Rowh, "Winning Government Grants and Contracts for Your Small Business," published by McGraw-Hill in 1992.
If all sources decline to participate, you have the option of "boot-strapping," which means starting small and growing carefully on the cash flow your business generates. Some guidelines to follow if you are bootstrapping, and even if you are not:
1. Look for a business that does not require a large capital investment.
2. Offer a high value, high margin product or service.
3. Pick a business that depends on personal selling rather than advertising.
4. Do not select a business that requires highly paid employees, unless they are willing to take part of their compensation in company stock.
5. Growth requires cash, lots of cash. Keep growth in check.
6. Watch your expenses.
7. Focus on cash flow.
8. Cultivate banks early (and often).
For additional guidance, you may wish to consult (among other books):
"Starting and Managing the Small Business," 3rd edition, by Arthur Kuriloff, John Hemphill and Douglas Cloud, published in New York by McGraw-Hill in 1993.
"New Venture Creation," fourth edition, by Jeffry Timmons, Homewood, IL: R D. Irwin, 1994.
7. A Note about Business Plan OutlinesVirtually every book on entrepreneuring has a business plan outline. Some are trivial. Some are reasonable, but incomplete.
In teaching the Entrepreneurship course, I wanted to give my students as comprehensive a business plan outline as possible in order to reduce risk to the new enterprise. I selected the best elements of all the business plan outlines I could find and assembled my own outline. You should search the Internet for additional suggestions about what to consider in developing your plan and the start-up of your business. See the next Chapter for a comprehensive Business Plan Outline.
8. Going from Business Plan to Business Start-UpEntrepreneuring is an evolutionary process. Most new entrepreneurs work as employees of a business firm when the idea hits that they should start their own business.
People entertaining such thoughts have enrolled in my "Entrepreneurial Policy" course. This course is goal-oriented and each student is required to write an original business plan for a new business. It is interesting to observe the transformation of these students from dedicated employees to potential entrepreneurs.
At the beginning of the semester, students appear uncomfortable about talking seriously about a non-existing business. Writing a business plan with financial projections seems to be an academic exercise. However, as the term progresses and they investigate the feasibility of their business concept and as they prepare and present progress reports and as they begin to fill in their business plan outlines, what started out as a speculative notion, begins to appear possible. By the end of the term, each student has a detailed business plan and in some instances, a new business is on its way. The amazing conclusion is that imagining, talking and writing about something that does yet not exist can lead to the beginning of a real enterprise with real customers and real income.
Not all of them start new businesses. Some conclude that their present job is more profitable than the new enterprise. Others are overwhelmed by the need to watch so many different aspects of the new business at the same time. Still others conclude that the idea is not feasible - it will never break even. A small percentage, less than 10% actually try to start the new business.
Your experience will probably follow a similar path. As you write your business plan, you will understand better what is required and what the potential rewards are. You may decide to go ahead with the new business, or you may decide to put it aside. In any event, you will learn a great deal and even if you do not have a successful start-up (or no start-up, at all) you will be in a better position to succeed next time you consider entrepreneuring. Some successful entrepreneurs had to start twice or three times before they succeeded. Good luck!
9. Summary of Preparation for Entrepreneuring1. Evaluate yourself with the help of objective tests and by seeking opinions of people who know you well and are inclined to be candid. The issue is do you have the eight qualities of successful entrepreneurs? Which ones are you missing? Can you acquire these missing traits through training? Prepare a plan for acquiring the missing traits.
2. SCAN three or four people and/or businesses. Define products or services that would help them to achieve their objectives more effectively or more efficiently. Estimate the size of the market for the most promising product or service you defined.
3. Start networking with well-informed people to increase your knowledge and to develop the contacts that you will need for raising capital, hiring key employees, acquiring a site, signing up customers and any other needs your business will have.
4. Network with entrepreneurs. Ask them what has worked well for them and what problems they have encountered and how they dealt with these problems. Select entrepreneurs in businesses similar to the one you are contemplating.
5. Read the Business Plan Outline (BPO) to become familiar with it. Make it a regular practice to reread the Business Plan Outline until you know it by heart.
6. f you have not yet mastered word-processing and spreadsheet analysis, do so. Obtain catalogs of software mail order houses and order business planning software on a 30 day trial basis. Use the software to become familiar with it. Plan ahead and inquire about easy to use accounting software for small businesses.
7. Write a business plan for your new business, following the Business Plan Outline in this chapter presented on the following pages. Consult other sources for ideas: the Internet, experts in your field, textbooks, professional associations, consultants, etc. Network and continue networking for as long as you are professionally active.
Last update: Thursday, August 18, 2005 at 4:38:50 PM
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