Entrepreneurship

INTERRELATIONSHIP OF SMALL BUSINESS, NEW VENTURE, & ENTREPRENEURSHIP

Small Business

  • an owner-managed business with fewer than 100 employees

New Venture

  • recently formed commercial organization that provides goods and/or service for sale

Entrepreneurship

  • the process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on it

  • Entrepreneurs: people who recognize and seize opportunities

Entrepreneurship Characteristics

  • resourcefulness and a concern for good long term customer relations

  • strong desire to be their own bosses

  • express a need to gain control over life or build for their family

  • able to deal with uncertainty and risk

  • some are behavioural, others are personality traits, and others are skills

Intrapreneurs

  • people who exhibit entrepreneural characteristics and create something new within an existing firm or organization

  • Key difference to entrepreneurs: typically do not have to concern themselves with getting the resources needed to bring a product to market because big companies tend to have the necessary resources available

THE ROLE OF SMALL & NEW BUSINESSES IN THE CANADIAN ECONOMY

Small Business

  • In all industries, at least half the workplace is employed by small business

  • Account for more than 80% of employement in agriculture, other services, accomodation and food services, and construction

  • Lead the way when it comes to innovation and new technology

New Ventures

  • Main source of job creation and responsible for most new products and services

  • Women are playing a more prominent role than ever before

THE ENTREPRENEURIAL PROCESS

  • Influenced by the sociocultural, economic, political, and technological factors in the broader environment

  • Three key elements: the entrepreneur, the opportunity, and the resources

Identifying Opportunities

  • generating ideas for new (or improved) products, processes, or services, screening those ideas, and developing the best ones

Screening

  • the idea creates/adds value for the customer

  • the idea provides a competitive advantage that can be sustained

  • the idea marketable and financially viable

  • the idea has low exit costs

Developing the Opportunity

  • clear notion of the business concept and an entry strategy for pursuing it must be developed

  • a comprehensive written business plan is required

New ventures use one or more of three main strategies:

  • introduce a totally new produce or service

  • introduce a product/service that will compete directly with existing competitive offerings but add a twist

  • buy a franchise

Franchise: an arrangement where a buyer purchases the right to sell the product or service of the seller

Business Plan: document that describes the entrepreneur’s proposed business venture, explains why it is an opportunity, and outlines its marketing plan, its operational and financial details, and its manager’s skills and abilities

Accessing Resources

Entrepreneurs acquire various resources needed to make the venture a reality by bootstrapping (doing more with less)

  • usually refers to financing techniques where they make do with less and use other people’s resources wherever they can 

  • can also refer to the acquisition of other types of resources, such as people, space, equipment, etc.

Financial Resources

There are two main types of financing:

  1. Equity Financing

  • Personal savings

  • Love money - investments from friends, relatives, and business associates

  • Private investors

  • Venture capitalists - come from professioally managed pools of investor money (venture capital)

  1. Debt Financing

  • Financial institutions

  • Suppliers - suppliers provide goods or services to entrepreneurs with an agreement to bill them later (trade credit)

Other Resources

  • Federal and provincial government assistance programs

  • Low interest loans

  • Business Bank of Canada - provides financing, venture capital, and consulting strategies

  • Incubators - provide new businesses with support (consulting services, legal advice, accounting services, business contracts, clerical services, and office space)

  • Internet - help gather research information, write business plan, and access government grants

  • Crowdfunding 

Building the Right Team

Consider two main issues:

  • the size and scope of venture

  • personal competencies

Assesing the Fit between Elements in the Entrepreneurial Process

  1. The Entrepreneur-Opportunity Fit

  2. The Opportunity-Resources Fitt

  3. The Entrepreneur-Resources Fit

STARTING UP A SMALL BUSINESS

Buying an Existing Business

  • increases the chances of success because the business has already proven its ability to attract customers and has an established relationships with lenders, suppliers, and other stakeholders

Taking over a Family Business

  • can provide otherwise unobtainable financial and management resources

  • often has a valuable reputation 

  • employee loyalty is high

  • may be disagreements over which family member assumes control

Buying a Franchise

Benefits for Franchiser

  • can attain rapid growth for the chain by signing up many franchisees in many locations

  • franchisees share in the cost of advertising

  • benefits from the investment money provided by franchisees

  • advertising money is spent more efficiently

  • freed from all details of a local operation

  • benefit from economies of scale in buying goods and earn revenues by charging mark-up in selling to franchisees

Benefits for the Franchisee

  • own a small business that has access to big business management skills

  • don’t have to build a business from scratch

  • failure rates are lower than starting own business

  • well advertised brand name

  • get to keep most of the profit they make

  • get lower prices for the raw materials they purchase

  • financial assistance is provided by the franchiser through loans

SUCCESS & FAILURE IN SMALL BUSINESS 

Reasons for Success

  • hard work, drive, and dedication

  • market demand for the product or service

  • managerial competence

  • luck

Reasons for Failure

  • managerial incompetence/experience

  • neglect

  • weak control systems

  • insufficient capital

FORMS OF BUSINESS OWNERSHIP

SOLE PROPRIETORSHIP

  • business owned and operated by one person

Advantages of a Sole Proprietorship

  • answer only to themselves

  • easy to form

  • losses can be deducted from income from personal resources other than the business

Disadvantages of a Sole Proprietorship

  • Unlimited Liability: the owner is personally responsible for all debts and obligations incurred by the business, putting personal assets at risk

  • lack of continuity - legally dissolves when the owner dies

  • depends on the resources of one person 

THE PARTNERSHIP

  • established when two or more individuals agree to combine their financial, managerial, and technical abilities to operate a business for profit

General Partners: actively involved in managing the firm and have unlimited liability

Limited Partners: do not participate actively in the business and their liability is limited to the amount they have invested in the partnership

Advantages 

  • ability to grow by adding talent and money

  • easier time borrowing funds than sole proprietorship

  • must begin with an agreement of some kind

Disadvantages

  • unlimited liability

  • if one partner incurs debt, they are all liable if the offending partner cannot pay up

  • lack of continuity - when a partner dies or pulls out, a partnership dissolves legally, even if the other partners agree to continue the business

THE CORPORATION

  • business that is a separate legal entity, liable for its own debts, and owners’ liability is limited to their investment

Shareholders: investors who buy shares of ownership in the form of stock (the real owners of a corporation)

Common Stock: paid on a per share basis (if dividend is declared)

Board of Directors: the governing body of a corporation

  • main responsibility is to ensure that the corporation is run in the best interests of the shareholders

  • choose the president and other officers of the business

  • delegate the power to run the day to day activities to the officers

  • set policy on paying dividends, financing major spending, and executive salaries and benefits

Inside Directors: employees of the company and have primary responsibility for the corporation

Outside Directors: not employees of the corporation

Chief Executive Officer: responsible for the firm’s overall performance

Types of Corporations

  1. Public Corporation: shares of stocks are widely held and available for sale to the general public

  1. Private Corporation: held only by a few people, generally not available for sale

  • controlling group may be family, employees, or the management group

Initial Public Offering (IPO): when a corporation grows and issues shares to the public to raise additional money

  • public corporations can also go private

Private Equity Firms: buy publicly traded companies and then make them private

Formation of a Corporation

Two most widely used methods:

  1. Federal incorporation under the Canada Business Corporations Act

  2. Provincial incorporation under any of the provincial corporations acts

  • The former is used if the company is going to operate in more than one province

  • The latter is used if the founders intend to carry the business in only one province

Advantages

  • limited liability - liability of investors is limited to their personal investment 

  • in an event of failure, courts may seize a corporations assets and sell them to pay debts, but the courts cannot touch the investor’s personal posessions

  • continuity - has legal life independent of its founders and owners 

Disadvantages

  • cost (approximately 2500)

  • need legal help in meeting government regulations as they are more heavily regulated than proprietorships or general partnerships

  • double taxation - corporation must pay income taxes on profirs and shareholders must also pay personal income taxes on the dividends they receive

THE COOPERATIVE

  • incorporated form of business organized, owned and democratically controlled by the people who use its products and servises

  • earnings distributed based on the use of cooperative rather than level of investment 

  • established to benefit its owners in the form of reduced prices or distribution of surpluses at year end

Advantages

  • limited liability

  • continuity

  • structure - each member has only one vote in the affairs, regardless of how many shares they own 

Disadvantages

  • equity investment - members do not have an incentive to invest equity capital of the cooperative 

  • democratic voting arrangements and dividends based on patronage discourage some entrepreneurs from forming or joining a cooperative