Chapter 3: Entrepreneurship, New Ventures, and Business Ownership
Find a Job You Love & Never Work Another Day
Examples of Successful Entrepreneurs
Steve Jobs
Late tech leader who started Apple in a garage
Grew Apple into a dominant company
Left Apple for more than a decade before returning to take the company to new heights
Jeff Bezos
Founder of Amazon.com which started as an online book retailer
Amazon became one of the world's most valued companies, selling a wide range of products
Mark Zuckerberg
Co-founder of Facebook while still a college student
Initially launched for select college campuses, quickly expanded to the broader public
Turned Zhang into one of the youngest self-made billionaires in America
Sara Blakely
Invested $5,000 to create Spanx, which is now valued at $1 billion
The idea was born from her frustration with pantyhose attire for previous jobs
No fashion experience but conducted extensive research on patents and fabrics
Objective 1: Define Small Business, Discuss Its Importance to the U.S. Economy, and Explain Popular Areas of Small Business
Definition of a Small Business
Characterized by little to no influence in its market
Typically under 500 employees (can be up to 1,500 depending on annual revenues)
Importance of Small Business in the U.S. Economy
Major source of employment for U.S. workers
Contributions measured in job creation, innovation, and support of big business
Job Creation
Small businesses are significant sources of new jobs
Tend to hire at faster rates and cut jobs at higher rates
First to hire during economic upswings, while big businesses are last to cut jobs during downturns
Innovation
Small businesses can create major innovations, having produced notable companies like Facebook, Amazon, and eBay
Produce 13 times more patents per employee compared to larger patenting firms
Contributions to Big Business
Most products by big businesses are sold by small businesses (e.g., car dealerships)
Online retail platforms hire small businesses for distribution and website development
Popular Areas of Small Business
Services
Fastest growing small business segment with low startup costs
Examples: hair salons, restaurants, dog walking services
Retailing
Sell products directly to consumers made by other firms
Example: boutique stores
Construction
Involves small local projects like kitchen remodeling
Wholesaling
Buying products in bulk from manufacturers to sell to retailers
Finance and Insurance
Affiliates of national firms; local banks common in smaller communities
Manufacturing
Generally dominated by large firms but some small businesses excel in innovation-driven fields like computer software
Transportation
Small trucking companies are examples of small businesses in transportation
Other
Includes small R&D labs, independent media firms, and local newspapers/radio
Objective 2: Explain Entrepreneurship and Describe Key Characteristics of Entrepreneurial Personalities and Activities
Definition of Entrepreneurs
Individuals who take on the risk of owning a business
Entrepreneurship: The process of seeking business opportunities under risky conditions
Common Goals of Business Owners
Independence from traditional employment
Financial security without overwhelming growth
Ambition for business growth
Startups often evolve in unexpected ways, exemplified by Facebook's explosive growth
Entrepreneurial Characteristics
Strong desire for independence
Resourcefulness and commitment to customer relations
Resolve to gain control over their lives and secure family wealth
Ability to manage uncertainty and risk
Objective 3: Business Plans and Startup Decisions for Small Businesses
Starting and Operating a New Business
Importance of a Business Plan
Business Plan Definition: Document outlining future objectives and strategies
Essential for:
Creating effective growth strategies
Determining future financial needs
Attracting investors and lenders
Understanding Distinctive Competencies
Identify a niche in established markets
Example: Warbly Parker identified dissatisfaction in eyeglass purchasing experience and pricing in an established market
Identifying New Markets
Market Transfer: Moving an established product/service from one geographic area to another
Creating New Industries: Building a new industry from scratch
First-Mover Advantage
Definition: Being the first firm to market a product/service provides a competitive edge, though it doesn't eliminate subsequent competition
Example: White Claw as a first mover in the hard seltzer market in 2016
Factors influencing White Claw's success: wellness trends, appealing flavor, increased demand, evolving gender norms, and viral marketing
Crafting a Business Plan
Components of a Business Plan
Use sales forecasting, financial planning, budgets, etc.
Sales Forecasting
Understanding current market states, competition strengths/weaknesses, and competition strategies
Financial Planning
Converting activities into monetary returns
Cash Budgets
Projecting pre-opening funds and sustaining costs until profitability
Other Financial Tools
Balance sheets and breakeven charts
Buying an Existing Business
Benefits of Acquisition
Existing businesses may come with established clientele and relationships with lenders/suppliers
Recommendations: Watch “The Founder” on the McDonald's case study
Franchising
Definition and Benefits
A franchise agreement exists between the franchisee (local owner) and franchisor (parent company)
Benefits include brand recognition, experience, and support from franchisor concerning location, lease negotiations, and marketing strategies
Financial Considerations
Despite benefits, there may be high startup costs
McDonald's Franchise
Franchise fee: $45,000
Initial investment: $1,008,000 to $2,214,080
Minimum liquid cash requirement: $500,000
Royalty fee: 4-5%
Anytime Fitness Franchise
Franchise fee: $35,000
Initial investment: $105,000 to $720,000
Minimum liquid cash requirement: $100,000
Royalty fee: $549 monthly
Starting from Scratch
Benefits and Risks
Complete control over business decisions
Higher risks confronted than when buying an established business
Sales Projections
Key considerations include identifying customers, their payment willingness, sales expectations, and competitor analysis
Financing the Small Business
Importance of Financial Relationships
Building good credit and relationships necessary
Funding sources: Personal savings, family/friends, SBA loans, venture capitalists, angel investors, etc.
Business Plan Requirement
Essential for acquiring capital
Loan Programs and Collateral
Specific loan requirements and possible risks, including providing personal guarantees
Notably, venture capitalists typically invest in established companies rather than startups
Objective 4: Trends in Small Business Startups
Emerging Trends
Rise of e-commerce
Transitioning from big business to small business due to burnout or idea discovery
Increased opportunities for minorities and women
Global opportunities in foreign markets
Improvements in survival rates for small businesses
Reasons for Startup Failure and Success
Failure Reasons
Managerial incompetence
Neglect of business responsibilities
Insufficient capital and budgeting errors
Success Factors
Hard work, drive, and dedication
Market demand for products/services
Managerial competence
Luck
Objective 5: Forms of Non-Corporate Business Ownership
Sole Proprietorships
Owned by one individual
Advantages
Independence and ease of formation
Tax benefits through personal tax filings
Disadvantages
Unlimited liability for debts
Business ends upon owner’s death
Partnerships
Commonly general partnerships where multiple persons co-own
Advantages
Growth opportunities
Disadvantages
Unlimited liability
Difficulties in ownership transfer
Alternative Partnership Types
Limited Partnership: Limited partners contribute financially but are not responsible for business debts beyond their investment; must have at least one general partner
Master Limited Partnership: Sells shares on public markets; retains majority control by the master partner
Cooperatives: Collective of sole proprietors or partnerships to leverage financial power while maintaining independence, popular in agriculture
Objective 6: Corporations
Corporation Overview
Most large businesses operate as corporations
Legal Characteristics
Legal entity separate from owners, responsible for its own debts
Limited investor liability to their investment
Advantages of Incorporation
Limited liability for investors
Continuous existence despite owner changes
Ability to raise funds through stock sale
Disadvantages of Incorporation
Risk of hostile takeovers
Higher startup costs
Double taxation on profits
Types of Corporations
Private Corporations: Stocks held by few individuals, not publicly traded
Publicly Held Corporations: Stocks available to the general public
S Corporations: Hybrid structure, avoids double taxation while following corporate regulations
Limited Liability Corporations (LLC): Taxed as partnerships but provides limited liability
Professional Corporations: For professionals like doctors and lawyers, protect against liability yet not immune
Multinational Corporations: Operate across borders, regulated in multiple countries
Managing a Corporation
Corporate Governance
The roles of shareholders, directors, and managers in corporate decision-making
Shareholders and Officers
Shareholders: Owners who can buy and sell stock
Board of Directors: Elected by shareholders to oversee management
Corporate Officers: Hired by the board to manage day-to-day operations
Special Issues in Corporate Ownership
Strategic Alliances: Organizations collaborate for mutual benefit (e.g., Target and Starbucks)
Joint Ventures: Shared ownership of new enterprises (e.g., Google and NASA for Google Earth)
Employee Stock Ownership Plans: Corporations hold stock for employees, giving them ownership rights
Institutional Ownership: Large investors purchasing large stock blocks for mutual funds
Mergers, Acquisitions, Divestitures, and Spin-Offs
Merger: Combining of two or more firms into a new entity
Example: United Airlines and Continental Airlines
Acquisition: One company buying another
Example: Google acquiring Android for $50 million
Divestiture: Selling a business operation to another firm, often to refocus on core areas
Spin-Off: Selling parts of a business to raise capital
How to Create a Company | Elon Musk's 5 Rules
See additional resources for insights
Quiz Information
Open-note/open-book quiz covering chapters 1-3 with 33 questions, each worth 0.20 points
Bonus opportunities available for achieving high scores