Chapter 6: Entrepreneurship and Starting a Small Business

Entrepreneurship and Starting a Small Business

The Job-Creating Power of Entrepreneurs in the United States

  • Entrepreneurship: Accepting the risk of starting and running a business.

  • Notable entrepreneurs:

    • Élruthère Irènèe du Pont de Nemours: Started DuPont in 1802.

    • David McConnell: Borrowed 500500 to start Avon.

    • George Eastman: Started Kodak with a 3,0003,000 investment in 1880.

    • Jeff Bezos: Started Amazon with investments from family and friends.

Why People Take the Entrepreneurial Challenge

  • Four major reasons:

    • Opportunity

    • Profit

    • Independence

    • Challenge

What It Takes to Be an Entrepreneur

  • Self-directed

  • Self-nurturing

  • Action-oriented

  • Highly energetic

  • Tolerant of uncertainty

Turning Passions and Problems into Opportunities

  • An idea is a good opportunity if:

    • It fills customers’ needs.

    • You have the skills and resources to start a business.

    • You can sell the product or service at a reasonable price and profit.

    • You can get your product or service to customers before the window of opportunity closes.

    • You can keep the business going.

Entrepreneurial Teams

  • A group of experienced people from different areas of business who join to form a managerial team.

  • Teams can:

    • Combine creative skills with production and marketing skills from the start.

    • Ensure more cooperation and coordination among functions.

Entrepreneurship within Firms

  • Intrapreneurs: Creative people who work as entrepreneurs within corporations.

  • Intrapreneurs use a company’s existing resources to launch new products.

  • Examples:

    • 3M’s Post-it Notes

    • Apple’s Mac computer

    • Sony’s PlayStation

  • 3M encourages intrapreneurship by requiring employees to devote at least 15% of their time to think about new products.

Micropreneurs and Home-Based Businesses

  • Micropreneurs: Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers them a balanced lifestyle.

  • More than half of U.S. micropreneurs are home-based.

  • Many are owned by people combining career and family.

Reasons for growth of home-based businesses:

  • Computer technology has leveled the playing field.

  • Corporate downsizing has led many to venture on their own.

  • Social attitudes have changed.

  • New tax laws have loosened restrictions on deducting expenses for home offices.

Challenges of home-based businesses:

  • Getting new customers is difficult.

  • Managing your time requires self-discipline.

  • Work and family tasks are sometimes not separated.

  • Government ordinances may restrict your business.

  • Homeowner’s insurance may not cover business-related claims.

Potential Home-Based Businesses

  • Personal creations (artwork, handmade items on Etsy, eBay, Amazon)

  • In-home services (tutoring, landscaping, snow shoveling, house cleaning, pet sitting, babysitting, web designing, personal training, home organizing, etc.)

  • Repair or skill-based services (tailoring, plumbing, home repairs, painting, etc.)

  • Consulting (technology, marketing, SEO, social media management)

  • Resale (buying and reselling goods online from garage or estate sales)

  • Shared-economy opportunities (Uber driver, Airbnb host)

Benefits of Home-Based Businesses

  • Ability to start immediately.

  • Minimal start-up capital needed.

  • No rent or excessive set-up charges.

  • Comfortable working conditions.

  • Reduced wardrobe expenses.

  • No commuting.

  • Tax benefits.

  • Elimination of office politics.

  • Low risk for trial and error.

Downsides of Home-Based Businesses

  • Difficult to establish work habits.

  • Limited support system.

  • Isolation.

  • Workspace may be limited.

  • Clients may be uncomfortable coming to your home.

  • Zoning restrictions.

  • Success is based 100 percent on your efforts.

Online Businesses

  • In 2019, online retail sales in the U.S. reached over 365billion365 billion, approximately 12 percent of all retail sales.

  • Must offer unique products or services.

  • Easy for copycats to copy successful products.

Boosting Your Business’s Online Presence

  • Establish an identity.

  • Be easy to find.

  • Go beyond blogging and create content.

  • Look out for opportunities.

  • Remember other forms of marketing.

  • Make sure your website has a mobile option.

  • Be friendly!

Encouraging Entrepreneurship: What Government Can Do

  • Immigration Act of 1990 created “investor visas”.

  • Enterprise zones: Specific geographic areas to attract private business investment offering lower taxes and government support.

  • Jumpstart Our Business Startups (JOBS) Act of 2012 offers tax breaks to raise funds and create jobs.

  • Incubators: Centers that offer new businesses low-cost offices with basic business services.

  • Self-Employment Assistance (SEA) program allows participants to collect self-employment payments instead of regular unemployment checks.

Small versus Big Business

  • Small business: Independently owned and operated, not dominant, meets SBA size standards.

  • Over 30 million small businesses in the United States.

Importance of Small Businesses

  • 65 percent of the nation’s new jobs are in small businesses.

  • More personal customer service.

  • Ability to respond quickly to opportunities.

Small-Business Success and Failure

  • About half do not last five years.

  • Reasons for failure:

    • Managerial incompetence

    • Inadequate financial planning

    • Choosing the wrong type of business

Causes of Small-Business Failure:

  • Plunging in without testing the waters on a small scale.

  • Underpricing or overpricing goods or services.

  • Underestimating how long it will take to build a market.

  • Starting with too little capital; or too much and being careless in its use.

  • Not allowing for setbacks and unexpected expenses.

  • Buying too much on credit; extending credit too freely or rapidly.

  • Failing to keep complete, accurate records.

  • Going into business with little or no experience.

  • Borrowing money without planning how and when to pay it back.

  • Attempting to do too much business with too little capital.

  • Carrying habits of personal extravagance into the business.

  • Not understanding business cycles; forgetting about taxes, insurance, and other costs.

  • Mistaking the freedom of being in business for oneself for the liberty to work or not, according to whim.

Situations for Small-Business Success:

  • The customer requires a lot of personal attention (e.g., a salon).

  • The product is not easily made by mass-production techniques (e.g., custom-tailored clothes or custom auto-body work).

  • Sales are not large enough to appeal to a large firm (e.g., a novelty shop).

  • The neighborhood is not attractive because of crime or poverty.

  • A large business sells a franchise operation to local buyers.

  • The owner pays attention to new competitors.

  • The business is in a growth industry (e.g., computer services or web design).

Learning about Small-Business Operations

  • Learn from Others

    • Take classes

    • Talk to successful entrepreneurs

  • Get Some Experience

    • Gain three years experience in the field.

    • Start a part-time small business.

  • Take Over a Successful Firm

    • Serve as an apprentice

Managing a Small Business

Planning Your Business

  • Business plan: A detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s).

    • Forces potential owners to be specific about what they will offer.

    • Mandatory for talking with bankers or investors.

  • A good executive summary catches interest and tempts potential investors to read on.

Outline of a Comprehensive Business Plan

  • Cover Letter

  • Section 1—Executive Summary

  • Section 2—Company Background

  • Section 3—Management Team

  • Section 4—Financial Plan

  • Section 5—Capital Required

  • Section 6—Marketing Plan

  • Section 7—Location Analysis

  • Section 8—Manufacturing Plan

  • Section 9—Appendix

Financing Your Small Business

  • Family and business associates are the most common source of funding.

  • Banks and finance institutions

  • Community development financial institutions (CDFIs) loan money and provide counseling, especially for lower-income communities.

  • Angel investors: Private individuals who invest their own money in potentially hot new companies before they go public.

  • Crowdfunding: A large group of individuals provide donations in support of a company or product.

  • Venture capitalists: Individuals or companies that invest in new businesses in exchange for partial ownership of those businesses.

  • Small Business Administration (SBA): A U.S. government agency that advises and assists small businesses by providing management training and financial advice and loans.

    • Started a microloan program in 1991 providing very small loans to small-business owners.

  • Small Business Investment Company (SBIC): A program through which private investment companies licensed by the SBA lend money to small businesses.

    • Must have a minimum of 5million5 million in capital and can borrow up to 22 from the SBA for each 11 of capital it has.

  • Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states.

    • Help evaluate the feasibility of ideas, develop business plans, and complete the funding application—for no charge.

Types of SBA Financial Assistance

  • Standard (7a) loans

  • Microloans

  • SBA Express

  • Export Express

  • International trade loans

  • Community Adjustment and Investment Program (CAIP)

  • 504 certified development company (CDC) loans

  • CAP Line loans

Knowing Your Customers

  • Market: People with unsatisfied wants and needs who have both resources and willingness to buy.

  • Set out to fill the market’s needs by offering top quality and great service at a fair price.

  • One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.

Managing Your Employees

  • Hiring, training, and motivating employees is critical.

  • Employees of small companies are often more satisfied with their jobs because they feel challenged and respected.

  • Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.

Keeping Records

  • Need accurate accounting and recordkeeping.

  • Many business failures are caused by poor accounting practices that lead to costly mistakes.

Looking for Help

  • May need outside advice in legal, tax, accounting, marketing, or finance.

  • Service Corps of Retired Executives (SCORE): More than 11,000 volunteers .counsel small businesses at no cost.

Going Global: Small-Business Prospects

  • Small Business Exporting Accounts for 9898 percent of all exporting firms.

  • Hurdles include:

    • Difficulty in finding financing

    • Not knowing how to get started

    • Not understanding cultural differences

    • Too much bureaucratic paperwork

Advantages of global trade for small businesses:

  • Overseas buyers enjoy dealing with individuals.

  • They can usually begin shipping much faster.

  • They provide a wide variety of suppliers.

  • They can give more personal service and attention.