Entrepreneurship

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