*

* Chapter Six

Entrepreneurship

and Starting a

Small Business

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

*

* The Job-Creating

Power of

Entrepreneurship

in the U.S.

• Entrepreneurship -- Accepting the risk of starting

and running a business.

WHAT is ENTREPRENEURSHIP?

6-2

*

* The Job-Creating

Power of

Entrepreneurship

in the U.S.

• French immigrant Élruthère Irènèe du Pont de

Nemours started Du Pont in 1802.

• David McConnell borrowed $500 from a friend to

start Avon.

• George Eastman started Kodak with a $3,000

investment in 1880.

• Jeff Bezos started Amazon.com with investments

from his family and friends.

NOTABLE ENTREPRENEURS

6-3

*

*

• Leanna Archer – At 12 years old, she has her own

hair care line.

• Alexis Holmes – Started baking for a fundraiser,

now the 16-year-old owns her own bakery.

• Jack Short & Daniel Lyons – The two medical

students started Factory Green, a carbon neutral

apparel company, as undergrads.

• Mark Zuckerberg – Launched Facebook as a

Harvard freshman.

YOU’RE NEVER TOO YOUNG

to be an ENTREPRENEUR (Spotlight on Small Business)

6-4

*

*

Source: Entrepreneur, www.entrepreneur.com, March 2009.

The Job-Creating

Power of

Entrepreneurship

in the U.S.

Age Range Percent Identified as

Self-Employed

55 to 59 28%

60 to 65 36%

66 to 70 42%

YOU’RE NEVER TOO OLD to be

an ENTREPRENEUR EITHER!

6-5

*

* Why People

Take the

Entrepreneurial

Challenge

• Opportunity

• Profit

• Independence

• Challenge

LG1

WHY TAKE the RISK?

6-6

*

* Why People

Take the

Entrepreneurial

Challenge

• Self-directed

• Self-nurturing

• Action-oriented

• Highly energetic

• Tolerant of uncertainty

LG1

WHAT DOES IT TAKE to be an

ENTREPRENEUR?

6-7

*

* Turning Your

Passion and

Problems into

Opportunities

• 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 still profit.

LG1

An IDEA is a

GOOD OPPORTUNITY IF…

• You can get your product or

service to customers before

the window of opportunity

closes.

• You can keep the business

going.

6-8

*

*

• Gary Hirshberg of Stonyfield

Yogurt wanted to run a profitable

business that didn’t hurt the

environment.

• Stonyfield Yogurt is a 100%

organic operation.

• It’s green practices save the

company millions of dollars each

year.

• After just 15 years, Stonyfield

outsells Kraft Foods yogurt.

THINKING

GREEN

LOGO

SOCIAL ENTREPRENEURSHIP:

RESPONSIBLE and PROFITABLE (Thinking Green)

6-9

*

* Entrepreneurial

Teams

• Entrepreneurial team -- A

group of experienced people

from different areas of business

who join to form a managerial

team with the skills to develop,

make and market a new

product.

• An entrepreneurial team

(Steve Jobs, Steve Wozniak

and Mike Markkula) was key

to Apple’s success.

LG1

ENTREPRENEURIAL TEAMS

6-10

*

* Micropreneurs and

Home-Based

Businesses

• Micropreneur -- 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 a balanced lifestyle.

• Many micropreneurs are home-based business

owners – writers, consultants, video producers,

architects, bookkeepers, etc.

• Nearly 60% of home-based micropreneurs are

men.

LG1

MICROPRENEURS

6-11

*

* Micropreneurs and

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.

LG1

HOME-BASED BUSINESS

GROWTH

6-12

*

*

Source: St. Louis Small Business Monthly, February, 2004.

• Ability to start your business immediately

• Minimal startup capital needed

• No rent or excessive set-up charges

• Comfortable working conditions

Micropreneurs and

Home-Based

Businesses

LG1

BENEFITS of HOME-BASED

BUSINESSES

• Reduced wardrobe expenses

• No commuting

• Tax benefits

• Elimination of office politics

• Low risk for trial and error

6-13

*

*

Source: St. Louis Small Business Monthly, February, 2004.

• Difficult to establish work habits

• Limited support system

• Isolation

• Work space may be limited

• Disruption of personal life

• Clients may be uncomfortable coming to your home

• Zoning restrictions

• Success is based 100% on your efforts

Micropreneurs and

Home-Based

Businesses

LG1

DOWNSIDES of HOME-BASED

BUSINESSES

6-14

*

*

• The latest outsourcing trend is using the Internet

to find affordable labor around the world.

• Elance provides small businesses with a hub to

find low-cost contractors.

• Thanks to the inexpensive freelancers, Elance

now has 48,500 clients, up 70% since 2007.

OUTSOURCING YOUR SMALL

BUSINESS (Reaching Beyond Our Borders)

6-15

*

* Web-Based

Businesses

• Affiliate Marketing -- An Internet-based marketing

strategy in which a business rewards individuals or

other businesses for each visitor or customer the

affiliate sends to its website.

LG1

ONLINE BUSINESS

• Web-based businesses have

more unique products than

most brick and mortar stores.

• Online sales reached $165.9

billion in 2007, 8% of all retail

sales.

6-16

*

* Entrepreneurship

Within Firms

• Intrapreneur -- A creative person who works as an

entrepreneur within a corporation.

• Intrapreneurs use a company’s existing

resources to launch new products for the

company.

• Art Fry of 3M developed Post-

Its when he was trying to mark

pages of his hymnal without

damage.

LG1

INTRAPRENEURS

6-17

*

* Encouraging

Entrepreneurship:

What Government

Can Do

• Immigration Act passed in 1990 created a

category of “investor visas” that encourage

entrepreneurs to come to the U.S.

• Enterprise Zones -- Specific geographic areas to

which governments attract private business

investment by offering lower taxes and other

government support.

• Incubators -- Offer new businesses low-cost offices

with basic services.

LG1

GOVERNMENT and

ENTREPRENEURSHIP

6-18

*

* Small Versus

Big Business

• Small Business -- Independently owned and

operated, not dominant in its field of operation and

meets certain standards of size.

• Businesses are “small” in relationship to other

businesses in their industries.

LG2

SMALL BUSINESSES

6-19

*

* Small Versus

Big Business

• There are 26.8 million small businesses in the

U.S.

• Of all nonfarm business in the U.S., almost 97%

are considered small.

• Small businesses account for over 50% of the

GDP.

• Small businesses generate 60-80% of new jobs.

• About 80% of U.S. workers first jobs were in

small business.

LG2

SMALL BUSINESS STATISTICS

6-20

*

* Importance of

Small Business

• More personal customer service.

• The ability to respond quickly to opportunities.

LG2

ADVANTAGES of SMALL OVER

BIG BUSINESS

6-21

*

*

Source: World Features Syndicate, 2009.

• Tommy Hilfiger – First store went bankrupt

• Milton Hershey – First confectionary failed

• H.J. Heinz – Company went bankrupt six years after

start

Small Business

Success &

Failure

LG2

THEY DID WHAT? Famous Business Failures

• Walt Disney – First film company

went bankrupt

• Henry Ford – First two car

companies failed

• L.L. Bean – Almost went bankrupt

in first year

6-22

*

* Learning About

Small Business

Operations

• Learn from Others – Investigate your local

colleges for classes on small business and

entrepreneurship; talk to and work for successful

local entrepreneurs.

• Get Some Experience – Gain three years

experience in the field; then start a part-time small

business.

• Take Over a Successful Firm – Serve as an

apprentice and eventually take over once the owner

steps down.

LG3

LEARNING ABOUT

SMALL BUSINESS

6-23

*

*

Suppose you worked in a company for two years and

you see signs of it faltering. You and a coworker have

ideas about how to succeed and are considering

quitting to start your own company.

• Should you approach other coworkers about working for

your new venture?

• Will you try to lure your old boss’ customers?

• What are the alternatives?

• What are the consequences?

• What is the most ethical choice?

GOING DOWN WITH the SHIP (Making Ethical Decisions)

6-24

*

* Managing a

Small Business

• Planning

• Financing

• Knowing customers

• Managing employees

• Keeping records

LG4

MAJOR BUSINESS FUNCTIONS

6-25

*

* Begin with

Planning

• Business Plan -- A detailed written statement that

describes the nature of the business, the target

market, the advantages the business will have

over competition, and the resources and owners

qualifications.

• A business plan forces potential owners to be

specific about what they will offer.

• A business plan is mandatory for talking with

bankers or investors.

LG4

BUSINESS PLANS

6-26

*

* Writing a

Business Plan

• A good plan takes a long time to prepare.

• A good executive summary catches interest and

tempts potential investors to read on.

LG4

WRITING a BUSINESS PLAN

• Getting the plan into

the right hands is

almost as important

as getting the right

information in it.

6-27

*

*

Source: Business Week Small Biz, www.businessweek.com, February/March, 2008.

• Clarify Expectations – What will each person

contribute?

• Discuss Work/Family Boundaries – What is the

line that separates work from personal relationships?

• Develop Good Communication – Agree about

types of decisions you’ll make jointly and on own.

• Clarify Long-Term Intentions – Discuss how long

everyone will work full time and goals for the business.

• Have an Escape Hatch – Have a Plan B.

Writing a

Business Plan

LG4

A FAMILY AFFAIR What to Consider Before Starting a Family Business

6-28

*

* Getting Money

to Fund a Small

Business

• Personal savings

• Relatives

• Former employers

• Banks & finance companies

• Government agencies

• Angel investors

• Venture capitalists -- Individuals or companies

that invest in new businesses in exchange for

partial ownership.

LG4

SOURCES of CAPITAL

6-29

*

*

Source: CFO Magazine, www.cfo.com, September 2008.

Getting Money

to Fund a Small

Business

LG4

ANGELS ABOVE Industry Sectors Favored by Angel Investors

6-30

*

* The Small

Business

Administration

• Small Business Administration (SBA) -- A

U.S. government agency that advises and assists

small businesses by providing management training

and financial advice.

• SBA started a microloan program in 1991 that

provides very small loans to small business

owners.

• Program judges worthiness on belief of the

borrower’s integrity and soundness of their

business ideas.

LG4

The SMALL BUSINESS

ADMINISTRATION

6-31

*

* The Small

Business

Administration

• Small Business Development Centers (SBDC)

are funded jointly by the federal government and

individual states.

• SBDCs are able to evaluate the feasibility of

your idea, develop your business plan and

complete your funding application – for no

charge.

LG4

SMALL BUSINESS

DEVELOPMENT CENTERS

6-32

*

* Knowing Your

Customers

• Market -- Consumers 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.

LG4

The MARKET

6-33

*

* Managing

Employees

• Hiring, training and motivating employees is

critical.

• Employees of small companies are often more

satisfied with their jobs – they feel challenged

and respected.

• Entrepreneurs best serve themselves and the

business if they recruit and groom employees

for management positions.

LG4

MANAGING EMPLOYEES

6-34

*

* Keeping Records

• Computers simplify the process by helping with

inventory control, customer records and payroll.

• A good accountant can help in:

- Deciding whether to buy or lease equipment.

- Deciding whether to own or rent a building.

- Tax planning.

- Financial forecasting.

- Choosing sources of financing.

- Writing requests for funds.

LG4

ACCOUNTING ASSISTANCE

6-35

*

* Looking for Help

• Owners need outside consulting advice early in

the process.

• Small and medium-sized firms cannot afford to

hire experts as employees.

• A competent lawyer can help with:

- Leases

- Contracts

- Partnership agreements

- Protection against liabilities

LG4

LEGAL HELP

6-36

*

* Looking for Help

• Marketing decisions need to be made long before

introducing a product or opening a store.

• A marketing research study can help you:

- Determine where to locate.

- Whom to select as your target market.

- What is an effective strategy for reaching the

market.

LG4

MARKETING RESEARCH

6-37

*

* Looking for Help

• A commercial loan officer can help: - Design an acceptable business plan.

- Give financial advice.

- Lend money.

• An insurance agent can help you: - Know the risks associated with the business.

- How to cover risks with insurance.

- How to prevent risks with safety devices.

• Service Corps of Retired Executives - More than 10,500 volunteers from industry, trade

associations, and education who counsel small

business at no cost.

LG4

OTHER FORMS OF HELP

6-38

*

* Going

International:

Small Business

Prospects

• Small and medium-sized businesses accounted

for 99% of recent export growth.

• Advantages of global trade for small businesses:

- Overseas buyers enjoy dealing with individuals.

- Small companies can usually begin shipping

much faster.

- They provide a wide variety of suppliers.

- They can give more personal service and

attention.

LG5

SMALL BUSINESS PROSPECTS

ABROAD

6-39