entrepreneurship a process perspective_chapter01

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entrepreneurshipa process perspect ive

2eRobert A. BaronWellington Professor of Management,Lally School of Management & Technology,Rensselaer Polytechnic Institute,Troy, NY

Scott A. ShaneProfessor of Economics and Entrepreneurship,Weatherhead School of Management,Case Western Reserve University,Cleveland, OH

Copyright 2008 Thomson Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.

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Entrepreneurship: A Process Perspective, 2nd EditionRobert A. Baron and Scott A. Shane

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chapter 1

learn ing ob j e c t i v e sA f t e r r e a d i n g t h i s c h a p t e r , y o u s h o u l d b e a b l e t o :

1 Define entrepreneurship as a field of business.

2 Explain why the activities of entrepreneurs are soimportant to the economies of their countries, andwhy entrepreneurship is an increasingly popularcareer choice.

3 Describe the process perspective of entrepre-neurship, and list the major phases of this process.

4 Explain why entrepreneurship can be viewed asarising out of the intersection of enterprising peopleand opportunities.

5 Understand why this text will both describe whatentrepreneurs actually do and what, perhaps, theyshould do!

6 Describe several issues and questions about entre-preneurship that are currently receiving greaterattention in the field (e.g., university-basedtechnology transfer).

7 Explain why certain sources of knowledge aboutentrepreneurship are more reliable and useful thanothers.

8 Describe the nature of three basic means for obtainingknowledge about entrepreneurship—systematicobservation, the case method, and experimentation—and the role of theory in the field of entrepreneurship.

Entrepreneurship: A Field,an Activity, and a Wayof Life

2


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Why do we start with these examples of what might be termed non-earth-shaking products? Because they illustrate several key points about entrepreneur-ship that we will make throughout this text. First, these entrepreneurs andtheir companies indicate that entrepreneurship is definitely a process—a chainof events and activities that takes place over time—sometimes, considerableperiods of time. It begins with an idea for something new—often, a newproduct or service. But the idea is only the start: Unless the process continues

Anyone who has invented a better mousetrap, or the contemporary equivalent,

can expect to be harassed by strangers demanding that you read their unpublished

manuscripts or undergo the humiliation of public speaking, usually on remote

college campuses.—Barbara Ehrenreich (1985)

If you have ever been an entrepreneur—or plan to

become one in the future—you will certainly come to

appreciate the accuracy of these words. One of us has

been an entrepreneur (Baron) and the other has worked

closely with them for many years (Shane), so we know

that many people seem to believe that entrepreneurs

have extraordinary powers—abilities that are almost

magical in nature. This belief, in turn reflects the widely

held view that entrepreneurs are unusual people. Think

about it for a moment. When we say the word ‘‘entre-

preneur,’’ what names come to mind? Bill Gates?

Michael Dell? Julie Aigner-Clark (founder of ‘‘Baby

Einstein’’)? Jeff Bezos (founder of Amazon.com)? Prob-

ably, because the fame of these entrepreneurs has

spread around the globe. But in fact, entrepreneurship,

as we’ll describe it in this book, is definitely not restricted

to this kind of awe-inspiring success in one of a handful

of industries. On the contrary, the entrepreneurial spirit

can be observed in much smaller companies and in an

almost endless array of contexts. For instance, consider

Lorraine Santoli. Growing tired of trying to find a facial

tissue while driving, she came up with a new idea—a cup

that holds and dispenses tissues one at a time and that

can fit in the cup holders found in almost every vehicle

(see Figure 1.1). The company she founded to develop

this idea—TissueKups Inc.—is now humming along with

sales in the millions. High tech? No. ‘‘Sexy’’? No.

Effective and appealing to many potential customers?

Something new that did not exist before? Yes!

Or, for another example, consider Victoria Malmer

who, like many millions of people in the United States and

other countries, wanted to drink more liquids because

doing so is good for personal health. Moreover, like many

people, she wanted her beverages to have a flavor she

liked. One solution is to carry around heavy bottles

containing preferred drinks. But Ms. Malmer didn’t like

doing that, so she and her friend Paul Staunton came up

with another idea: why not produce flavorings in small

containers that people can easily carry with them and add

to any beverage to get the taste they like? The company

they started to produce this and similar products—

Flavor2Go—is now riding a wave of sharply rising sales.

Figure 1 . 1 From Small Inventions, Profitable Companies

Sometimes Grow

New products don’t have to be dramatic to succeed. TheTissueKup, created by Lorraine Santoli, is a good illustration ofthis fact. The device, which fits into the cup holders found inalmost all vehicles, is useful to many drivers, and has found alarge and ready market.

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C H A P T E R 1 Entrepreneurship: A Field, an Activity, and a Way of Life 3


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so that the idea is converted into reality (actually brought to market through anew business venture, licensing to existing companies, etc.), it is notentrepreneurship. Rather, it is just an exercise in creativity or idea generation.

Second, these examples underscore the fact that being an entrepreneur doesnot necessarily involve starting a particular kind of company, working in aparticular industry or sector (e.g., high-tech), or coming up with a dramaticnew product. On the contrary, as we’ll see over and over again, the heart of theprocess involves bringing something new—something that is not now beingproduced or exploited by others—to the marketplace. We’ll have more to sayabout this, the heart of entrepreneurship, later; here, we simply want to break themind-set with which many people enter their first course in entrepreneurship—an approach reflecting several major myths about entrepreneurship (e.g., it can’toccur without large amounts of capital, it must be based on new technology, musttap a really ‘‘hot’’ market, and so on). We’ll be discussing—and refuting—theseand other false ideas throughout this book, so stay tuned for more about thispoint because our goal is to present an accurate picture of what entrepreneurshipreally is, rather than a repetition of what many people think it is.

Having clarified these important points, we now turn to several tasks thatwe want to accomplish in this initial chapter. First, we present a definition ofentrepreneurship as an activity, a field of study in business, and a way of life.Next, we’ll offer a framework for understanding entrepreneurship as a process—one that unfolds over time. As we’ll soon see, this process is affected by manydifferent factors, some relating to individuals (i.e., entrepreneurs), some to theirrelations with other people (e.g., partners, customers, venture capitalists), andsome to society as a whole (e.g., government regulations, market conditions). Amajor theme of this book will be that all three kinds of factors (individual,group, societal) play an important role in every phase of the entrepreneurialprocess. As part of this discussion, we emphasize yet another key theme: At theheart of the entrepreneurial process lies the intersection of opportunitiesgenerated by changing economic, technological, and social conditions, as well asenterprising people capable of recognizing and actively exploiting them. Thistheme will be examined in more detail in Chapter 2, which focuses on theemergence of opportunities, and Chapter 3, which focuses on the cognitivefoundations of entrepreneurship (e.g., where ideas for new products or servicesoriginate and how individuals actually perceive or recognize opportunities).

Third, we’ll comment briefly on current trends in the field of entrepreneur-ship—topics and questions that are receiving growing attention because theyare increasingly recognized as playing an important role in the entrepreneurialprocess.

After that, we consider the question of how we know what we currentlyknow about entrepreneurship—in other words, how the information presented inthis book was obtained. We think this point is important because, in general, it isdangerous to accept any information as accurate without knowing somethingabout its source and how it was obtained. Finally, we provide you with anoverview of the contents of this book and a description of its special features.Now, to begin at the beginning, we offer a definition of entrepreneurship—adefinition that will be reflected in the contents of every chapter.

The Field of Entrepreneurship:Its Nature and RootsDefinitions are always tricky, and for a field as new as entrepreneurship, the taskis even more complex. It is not surprising, then, that currently, there is no singleagreed-upon definition of entrepreneurship either as a field of study in businessor as an activity in which people engage. Having said that, we should note that

learningobjective 1Define entrepreneurship as

a field of business.

4 P A R T 1 Entrepreneurship: Who, What, Why?


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a definition offered by Shane and Venkataraman1 has received increasing accep-tance. Broadly paraphrased, their definition suggests the following:

Entrepreneurship, as a field of business, seeks to understand howopportunities to create something new (e.g., new products or services, newmarkets, new production processes or raw materials, new ways of organizingexisting technologies) arise and are discovered or created by specificindividuals, who then use various means to exploit or develop them, thusproducing a wide range of effects.

By implication, this definition suggests that entrepreneurship, as an activitycarried out by specific individuals, involves the key actions we mentionedearlier (identifying an opportunity that is potentially valuable in the sense thatit can be exploited in practical business terms and yield sustainable profits),and the activities involved in actually exploiting or developing this opportu-nity. In addition, as we note in a later section of this chapter, the process doesnot end with the launching of a new venture; it also involves being able to run anew business successfully after it comes into existence.

We believe that this definition is a clear and useful one, and does indeedcapture the essential nature of entrepreneurship. Although it helps to clarifymany important questions, perhaps the most central of these is: ‘‘Just whatmakes someone an entrepreneur?’’ To see how the definition offered by Shaneand Venkataraman helps significantly in this respect, consider the followingindividuals. For each, ask yourself the following question: ‘‘Is this person anentrepreneur?’’

n A woman who enjoys making appetizers for parties in her home, and whois often praised by her friends who tell her how delicious these are, starts acompany to make and sell them.

n A university scientist engaged in basic research on the biochemistry of life,makes important discoveries that advance the frontiers of his field;however, he has no interest in identifying practical uses of his discoveriesand does not attempt to do so.

n After being ‘‘downsized’’ from his management level job, a middle-agedman discovers a special way of processing old tires to make edging forgardens (borders that keep different kinds of plants separate).

n A retired army officer purchases obsolete amphibious vehicles from thegovernment and uses them to start a company that specializes in tours ofremote wilderness areas.

n A man who has often forgotten the numbers needed to open combinationlocks comes up with a new idea: why not build a lock that uses lettersinstead of numbers? He enters the idea (which he previously patented) in acontest for new inventions, and wins. The retailer that runs the contest signsa contract with him to sell this new kind of lock at all of its 1,200 stores.

Which of these individuals are entrepreneurs? At first glance, you might betempted to conclude that only the last two are really entrepreneurs—only theybrought something new to market. We suggest, however, that all of theseindividuals with the exception of the university scientist are entrepreneurs.Why? Recall our definition: Entrepreneurship involves recognizing an oppor-tunity to create something new. It does not have to be a new product or service;on the contrary, it can involve recognizing an opportunity to develop a newmarket, to use a new raw material, or to develop a new means of production, tomention just a few possibilities. According to this definition, the appetizer-baking woman is acting as an entrepreneur because she recognized a newmarket—one that will pay a premium price for appetizers that taste trulyhomemade. In fact, this is just what Nancy Mueller did when she started Nancy’sQuiche—a company she recently sold for several hundred million dollars.



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Similarly, the downsized executive is using an existing ‘‘raw material’’—old tires—in a new way. This activity, too, qualifies as entrepreneurship. Theretired Army officer and the inventor are also entrepreneurs: Both identifiedopportunities for new products or services, and both took active steps toexploit these ideas in ways that generate economic gains.

In contrast, the university scientist is not an entrepreneur according to ourdefinition. Even though his research does add appreciably to humanknowledge, the fact that he makes no effort to apply his discoveries to thedevelopment of new products, services, markets, or means of production,suggests that he not an entrepreneur. Certainly, he is playing a valuable role insociety; but no, he is not an entrepreneur.

In fact, scientists often can be entrepreneurs. For instance, one of us(Baron) is privileged to teach, from time to time, with a Nobel-prize winningphysicist, Ivar Giaever. Prof. Giaever used his scientific knowledge to developa new product—one that can help physicians identify cancer cells not bylooking at them through a microscope (what they typically do), but in terms ofthe electrical activity of the cells. Professor Giaever found that cancer cells andnormal cells differ in this respect, and his product—which he patented—maywell soon become a commercial as well as a scientific device. Whether it doesor not, the fact that he has attempted to bring this new product to marketmakes him an entrepreneur as well as a world-class scientist.

In essence, then, entrepreneurship requires creating or recognizing acommercial application for something new. The new commercial applicationcan take many different forms, but simply inventing a new technology,product, or service, or generating a new idea is not, in itself, enough. As shownin Figure 1.2, many inventions never result in actual products for the simplereason that they offer no commercial benefits (or, alternatively, no one canthink of a marketable use for them), and so they cannot really serve as the basisfor a profitable new business. In sum, we agree with Shane and Venkataraman

Figure 1 .2

Newness Is Not Enough!

As shown here, the fact that aproduct is new is not sufficient toassure that it will be developedand brought to market. We doubt,for instance, that the productshown here will ever really existoutside the cartoonists’imagination.

Source: Universal Press Syndicate, September 4, 2001.



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and with other theorists2 that entrepreneurship emerges out of the intersectionof what might be termed inspiration and activation—recognizing opportunitiesfor something new that people will want to own or use, and taking vigoroussteps to convert these opportunities into viable, profitable businesses.

A Recent Extension and Clarification

The definition offered by Shane and Venkataraman appears to be a useful oneand has gained widespread acceptance in the field of entrepreneurship.However, we should note that it has recently been extended and clarified byMcMullen and Shepherd, two well-known researchers.3 They note that inessence, entrepreneurship involves two key phases or activities. In the first,individuals (potential entrepreneurs) use their existing knowledge andpersonal strategies for obtaining knowledge, to recognize that some oppor-tunity exists—an opportunity that someone, not necessarily they, can develop.In the second phase, they evaluate this opportunity to determine whether theyhave the knowledge and skills needed to actually develop it. In other words,they try to determine whether the opportunity is one they can pursue bytaking such actions as founding a new venture. In essence, this framework isfully consistent with the definition offered earlier, but it also helps to highlightthe importance of individual motivation, skills, and knowledge in entrepre-neurial action, and the additional point—a very important one we’ll makeagain in Chapter 3—that recognizing an opportunity can be quite distinct fromactually doing something about it.

Other additions to the framework have been offered as well. One of themost interesting, suggested by Sarasvathy,4 proposes that we should focus notso much on who, why, and how specific persons identify particularopportunities, but rather on the barriers that prevent some persons frombecoming entrepreneurs, and on how entrepreneurs create specific kinds offirms because these new businesses are the ‘‘tool’’ through which entrepre-neurs convert their ideas and skills into means of exploiting variousopportunities. When added to the definition proposed by Shane andVenkataraman, these more recent suggestions truly enrich our basic under-standing of the process of entrepreneurship and how it unfolds.

A Note on Intrapreneurship

Before turning to other topics, we should note, briefly, that recognizingopportunities for creating or developing something new can occur withinexisting organizations as well as outside them.5 In fact, many successfulcompanies are deeply concerned with encouraging innovations and take activesteps to provide an environment in which it can flourish.6 These companieswork to develop a corporate culture that is receptive to new ideas rather thanone that routinely rejects them, and provide concrete rewards for innovation.7

For instance, General Electric offers employees who come up with innovativeideas a share of the profits resulting from them. Although we can’t say forcertain that this policy increased innovation at GE, the company obtained morepatents during recent decades than any other U.S. company; in fact, it holdsmore 51,000 in total! Individuals who act like entrepreneurs inside a companyare often described as being intrapreneurs—people who create something new,but inside an existing company rather than through the route of founding anew venture. Unfortunately, they often face formidable barriers or obstacles,because not all organizations are as committed to innovation as GeneralElectric. However, innovation is truly essential for gaining and sustainingcompetitive advantage, so it is something all organizations should seek.8

Although our focus will be firmly on entrepreneurs throughout this book, wedo want to note that individuals can act entrepreneurially in several differentcontexts, including large, existing companies.



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Entrepreneurship: An Engine of Economic GrowthWhen one of us (Robert Baron) began his career as a university professor (in1968), courses such as this one simply did not exist. Now, in contrast, courseson entrepreneurship are offered by virtually every school of management orbusiness and show a pattern of rapidly growing enrollments in recent years.Why? One reason is that such courses reflect parallel growth in the number ofindividuals choosing to become entrepreneurs—or at least to start their ownbusinesses. Each year, more than 600,000 new businesses are launched in theUnited States alone, and this number almost doubled in the past two decades.9

Not all of these start-ups would meet our definition for involvingentrepreneurship, but all of them—to the extent they are successful—contribute to economic growth. Consider the following facts:

n During the past two decades, large corporations in the United States havedownsized (a kind word for ‘‘eliminated’’) more than 6 million jobs, yetunemployment fell to record-low levels—mainly as a result of newcompanies started by entrepreneurs.

n In recent years, more than 900,000 new start-up companies were foundedin the United States (U.S. SBA, 1999, 2001).

n Currently, more than 10 million individuals are self-employed in theUnited States (U.S. SBA 1998, 2002)—about one in eight adults! And takentogether, U.S. firms with fewer than 500 employees (many of which werestarted by entrepreneurs), account for 51 percent of private sector output,employ 51 percent of private sector workers, and constitute 99 percent ofall employers (U.S. SBA, August 2001).

n Even though the number of new businesses started each year hasincreased steadily, the number started by women and minorities roseeven more dramatically; for instance, the number of companies owned byminorities increased 168 percent between 1987 and 1997, to a total of3.25 million businesses employing more than 4 million and generating$495 billion in revenues (U.S. SBA, 1999).

These statistics suggest that the activities of entrepreneurs have a trulymajor impact on the economies of their societies.

Even a casual glance backward at history suggests that entrepreneurs havealways existed and always ‘‘made waves’’ in their societies: Vast fortunes werecertainly amassed by entrepreneurs of the past such as John D. Rockefeller,Andrew Carnegie, and Cornelius Vanderbilt. Yet, more people than ever arepursuing, or considering, this role. For instance, look at Figure 1.3; it shows thenumber of franchises sold each year from 2000 to 2005. (Many people who want

Figure 1 . 3

Interest in Entrepreneurship: On

the Rise

As shown here, the number offranchises sold each year in theUnited States increased greatly.Because franchising is one meansfor individuals to become entre-preneurs (or, sometimes, to getready to become entrepreneursby gaining important kinds ofexperience), this trend reflectsgrowing interest in entrepreneurship.

250,0002000 2001 2002 2003

Year2004 2005

274,000

291,000

310,000

342,000 338,000

351,000

290,000

310,000

330,000

350,000

370,000

270,000

Fran

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old

The number of franchises soldrose sharply in recent years.

Source: Adapted from Entrepreneur Magazine, January 2005, p. 79.

learningobjective 2Explain why the activities of

entrepreneurs are so important

to the economies of their

countries, and why entrepre-

neurship is an increasingly

popular career choice.



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to become entrepreneurs use franchises as a means of attaining this dream; seeChapter 8.) As you can see, the numbers are both amazing and rising rapidly.

What factors are responsible for this trend? Many appear to be playing arole. First, the media are filled with glowing accounts of successfulentrepreneurs such as Howard Schultz (Starbucks), Pierre Omidyar (eBay;see Figure 1.4), and Scott Cook (Intuit). As a result, the role of entrepreneur hastaken on a positive and attractive aura. In an age when political and militaryheroes are few and far between, entrepreneurs, in a sense, become the newheroes and heroines, so it is far from surprising that growing number ofindividuals are choosing to pursue this kind of career.

Second, there has been a fundamental change in what has often beentermed ‘‘the employment contract’’—the implicit understanding betweenemployers and employees.10 In the past, this implicit agreement suggested thatas long as individuals performed their jobs well, they would be retained asemployees. Now, in an era of downsizing and ‘‘rightsizing,’’ this agreementhas been rewritten, with the result that many individuals feel little loyalty totheir current employers. It is just one small step from such feelings to theconclusion, ‘‘I’d be better off working for myself!’’

A third factor is a change in basic values. In the past, job or career securitywas a dominant theme for many people: They wanted a secure job with steadyincrements in salary. Now, surveys indicate that young people, especially,prefer a more independent lifestyle—one that offers choice in place of certaintyor predictability.11 Together, these and many other factors combine to bolsterthe allure of becoming an entrepreneur and, as noted previously, translate intothe creation of hundreds of thousands of new businesses employing millionsof people. This trend is stronger in the United States than elsewhere, but seemsto picking up steam around the world as government leaders in manycountries recognize that entrepreneurs do matter—and matter greatly.

The Field of Entrepreneurship:Foundations in Other DisciplinesNothing, it has often been said, emerges out of a vacuum. And where thefield of entrepreneurship is concerned, this is certainly true. Entrepreneurship,as a branch of business, has important roots in several older and moreestablished fields—and with good reason. Consider, again, our definition of

Figure 1 .4 The Romance of Entrepreneurship

In a sense, entrepreneurs are the new heroes and heroines—they are often presented in flattering terms by the media. As a result, theappeal of becoming an entrepreneur increased greatly in recent years. Shown here are famous entrepreneurs of the past and present—Pierre Omidyar, J. D. Rockefeller, and Andrew Carnegie.

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entrepreneurship—a field of study that seeks to understand how opportunities tocreate new products or services, new markets, production processes, ways oforganizing existing technologies, or raw materials arise and are discovered byspecific individuals, who then use various means to develop them. This definitionimplies that in order to understand entrepreneurship as a process—and as anactivity in which entrepreneurs engage—it is essential to consider (1) theeconomic, technological, and social conditions from which opportunities arise,(2) the people who recognize these opportunities (entrepreneurs), (3) the businesstechniques and legal structures they use to develop them, and (4) and theeconomic and social effects produced by such development. All of these elementsplay a role in entrepreneurship, and all must be taken into account if we areever to fully understand this complex process. These elements, in turn, implythat the field of entrepreneurship is closely linked to older disciplines such aseconomics, behavioral science (psychology, cognitive science), and sociology.The findings and principles of these fields can shed much light on many aspectsof entrepreneurship and provide valuable frameworks for understanding keyquestions addressed by the field—questions such as ‘‘How do opportunitiesarise?’’ (see Chapter 2), ‘‘Why do some individuals but not others recognizethem?’’ (see Chapter 3), and ‘‘What factors influence the success of new venturesafter they are launched?’’ (see Chapters 10, 11, and 12).

Admittedly, these questions are somewhat abstract, so perhaps a concreteexample will be helpful. Consider the rapid growth of one successful high-techcompany: Expedia.com. Expedia is an online travel service that allows users tobook flights, hotel rooms, and rental cars from any computer with access tothe Internet. The company’s growth has been swift, so it seems clear that itsfounders recognized an excellent opportunity and went on to exploit it well.But now consider the following question: Could Expedia.com havebeen launched 10 years ago? The answer is ‘‘Almost certainly no.’’ And thereason it could not is straightforward: technological, economic, and socialforces had not yet generated the opportunity that the founders of Expedia.comrecognized. From a technological point of view, an online travel service couldnot exist until many millions of people had access to the Internet, anduntil software capable of integrating the schedules of dozens of airlines andthe rates of thousands of hotels existed. From an economic point of view, sucha service could not be viable until a safe and reliable way of making paymentsover the Internet existed and unless airlines and hotels were willing to paycommissions to an Internet company instead of, or in addition to, traditionaltravel agents. Finally, from a social perspective, an online travel servicecould not exist and prosper until large numbers of people had enoughconfidence in online information and transactions to entrust their travel plansto it, and until large numbers of people became aware of the fact that travelerson the same flights often paid hugely different fares (see Figure 1.5). In sum,the opportunity for founding Expedia.com did not always exist; rather, itemerged—and became available for discovery by specific individuals—out ofa combination of many factors, economic, technological, and social.

In a similar manner, the disciplines of economics, behavioral science, andsociology can help to provide answers to other basic questions addressed by thefield of entrepreneurship, questions such as: ‘‘Why do some individuals but notothers recognize opportunities?’’ ‘‘Why are some entrepreneurs so much moresuccessful than others?’’ and ‘‘Why are some means for developing opportunitiesmore effective than others?’’ Clearly, then, the field of entre preneurship does notexist in an intellectual vacuum; rather, its roots rest firmly in several olderdisciplines that, together, provide it with a firm foundation for understanding oneof the most complex—and important—business processes in existence.

One final comment: Are some of these disciplines more useful than othersin our efforts to understand entrepreneurship as a process? In other words,should we focus primarily on economic factors, on factors relating toentrepreneurs, or on factors relating to society as a whole in our efforts to



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understand the entrepreneurial process? This issue has sometimes beendebated in the context of a distinction found in several other branches ofmanagement: macro versus micro approaches.12 Macro approaches take a‘‘top-down’’ perspective, seeking to understand how and why new venturesare founded, and why they succeed or fail, by focusing largely on what areoften termed environmental factors—economic, financial, industry, and politicalvariables. Presumably, these factors, which are largely beyond the directcontrol of individuals, shape the behavior and decisions of individualentrepreneurs, so understanding their impact is crucial. In contrast, microapproaches take a ‘‘bottom-up’’ perspective, seeking to understand theentrepreneurial process by focusing primarily on the behavior and thoughtsof individuals or groups of individuals (e.g., founding partners). Presumably,it is the way in which individuals behave that is the key to understanding theentrepreneurial process. Is either view more accurate or more useful than theother? Absolutely not. We believe that full understanding of entrepreneurshipcan only be gained through careful consideration of both perspectives. In fact,we agree strongly with one colleague who recently noted that a key definingaspect of entrepreneurship is that it involves efforts to understand how microfactors (e.g., the ideas, thoughts, and actions of individuals) interface withenvironmental factors (technology, life cycle of a given industry, economicconditions, etc.).13 In other words, a central question in the field ofentrepreneurship is: ‘‘How are the motives, ideas, and intentions of individualentrepreneurs and the environmental conditions they face (e.g., conditions inspecific markets of industries) reflected in the kind of companies they start?’’In essence, the two approaches are complementary, and both are needed togain a full understanding of entrepreneurial process. For this reason, both willbe represented throughout this book.

What Entrepreneurs Do Versus What, Perhaps,They Should Do: Where Research-BasedPrinciples Meet Actual PracticeAs we mentioned earlier, one of us (Baron) has been an entrepreneur; in fact, hehas started and run two different companies. These experiences were, by andlarge, very good ones, but when Prof. Baron thinks about them, he often pondersthis thought: ‘‘How great it would have been to have had the knowledge in this

Figure 1 .5

Opportunities Often Emerge from

Change

In recent years, increasing numbersof persons have become aware ofthe fact that people on the sameflights or staying in the same hotelsoften pay different rates. Thisawareness was one factor thatcreated the opportunityExpedia.com and similar companieshave exploited.

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book when he started those companies!’’ Looking back, he now realizes that hemade virtually every mistake that lies in wait for unsuspecting entrepreneurs–mistakes that experienced ones generally avoid. From choosing a partner (notwell!) to signing a licensing agreement (too favorable to the large company thatlicensed Prof. Baron’s technology), he made one serious error after another.Despite this, both companies survived and were profitable, but how well mightthey have done if he had known how to avoid these mistakes?

We’ll never know, but it seems possible that the answer is that thesecompanies would have been much more successful. We mention thesepersonal experiences here because they illustrate what we think is the real andlasting value of this book—one reason you may want to keep it on yourbookshelf in the years ahead. In the pages that follow, we don’t simplydescribe what entrepreneurs do—how they recognize opportunities, obtainfinancing, start companies to exploit these opportunities, and so on. Inaddition, we will also try to indicate what, perhaps, they should be doingduring each phase of the entrepreneurial process. In other words, we will tryto tread the fine line between actual practice—what goes on in the hectic andturbulent world entrepreneurs face each day—and steps that, according to thefindings of careful research, would be helpful to them in their efforts to startand run successful new ventures. For this reason, we’ll cover many practicesand activities that entrepreneurs do not always recognize and adopt butwhich, we believe, can be highly beneficial. For instance, research findingssuggest that entrepreneurs who engage in such activities as performing acareful feasibility analysis (a preliminary evaluation of a business idea todetermine whether it seems worth pursuing; see Chapter 3), developing clearbusiness models (a company’s plans for how it will compete, use its resources,deal with customers, and generate profits; see Chapter 7), and engaging incareful competitor analysis (detailed analysis of a company’s competitors, as aninitial step in planning how to gain competitive advantages over them; seeChapter 4) are more likely to succeed than those who do not.14 Sad to say,Professor Baron did not perform these activities when he started his owncompanies, and he is now convinced that not doing so had negativeconsequences for the success of these new ventures.

In short, after reading this book and making the concepts and ideas itpresents your own, you will, we firmly believe, be much better prepared tomeet the challenges of starting a new venture than was true for Prof. Baron—and perhaps a majority of all first-time entrepreneurs. So no, we definitely donot have all the answers, at least not perfect or complete ones; the field ofentrepreneurship is still too young for that. But we can offer advice for actionsand procedures that will help tip the balance in your favor as an entrepreneur.So please read on; the new ventures that benefit will be your own!

K E Y

P O I N T S

n Entrepreneurship, as a field of business, seeksto understand how opportunities to createsomething new (new products or services,new markets, new production processes orraw materials, new ways of organizing existingtechnologies) arise and are discovered orcreated by specific individuals, who then usevarious means to exploit or develop them, thusproducing a wide range of effects.

n In recent years, the allure of entrepreneurshiphas increased, with the result that morepeople than ever before are choosing thisactivity as a career.

n Entrepreneurship, as a branch of business,has important roots in economics, behavioralscience, and sociology.

n The field of entrepreneurship recognizes thatboth the micro perspective (which focuses onthe behavior and thoughts of individuals) andthe macro perspective (which focuses pri-marily on environmental factors) are importantfor obtaining a full understanding of theentrepreneurial process.

n This book will do more than describe whatentrepreneurs do (common practice); it will gofurther and describe actions and proceduresentrepreneurs can perform to increase thelikelihood that their companies will succeed.



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Entrepreneurship: A ProcessPerspectiveNow that we have offered a working definition of entrepreneurship,highlighted its importance, and briefly described its roots in relateddisciplines, we will turn to another key task: suggesting a framework forunderstanding it as a process. This will be a guiding theme for the remainderof this book, so it is important that we present it clearly and that youunderstand fully what it implies.

The view that entrepreneurship is a process rather than a single event iscertainly not new or unique to this text; on the contrary, there is a growingconsensus in the field that viewing entrepreneurship as a process whichunfolds over time and which moves through distinct but closely interrelatedphases is both useful and accurate.15 Further, there is general agreement thatthe key phases in this process are as follows:

n Recognition of an Opportunity: The entrepreneurial process often beginswhen one or more individuals recognize an opportunity—the potential tocreate something new (new products or services, new markets, newproduction processes, new raw materials, new ways of organizing existingtechnologies, etc.) that has emerged from a complex pattern of changingconditions—changes in knowledge, technology, economic, political, social,and demographic conditions.16 Opportunities have the potential togenerate economic value (i.e., profit) and are viewed as desirable in thesociety in which they occur (i.e., development of the opportunity isconsistent with existing legal and moral standards, and would, therefore,not be blocked or constrained by these standards).

We will examine the emergence of opportunities in Chapter 2 and thecognitive roots of entrepreneurship in Chapter 3, but for the moment, wewant to emphasize just one point: in a sense, there really is nothing‘‘entirely new under the sun.’’ Ideas do not emerge out of a void; on thecontrary, they almost always consist of a novel combination of elementsthat already exist. What is new is the combination and the recognition oflinks or connections between the various elements of which the ideas arecomposed. To take a striking example from history, Alexander GrahamBell did not invent the telephone out of sheer creative genius. Rather, hecombined component ideas that already existed and had been generatedby other people (e.g., electric batteries, basic research on the nature ofsound, etc.) in a new way and invented a product that revolutionizedhuman communication.

Similar argument holds for recognizing opportunities. The oppor-tunities themselves often emerge from changes in economic, technological,governmental, and social factors. When entrepreneurs notice links orconnections between these changes (i.e., when they notice patterns in thesechanges), ideas for new ventures may quickly follow. For instance,consider Bill and Cheryl Brown, who recently started The Second TimeAround, Inc., a company that helps people getting married for the second(or third or fourth) time plan their weddings (see Figure 1.6).17 Thecompany experienced tremendous growth because, in essence, itscompetitors—existing wedding services—focus entirely on young peoplegetting married for the first time. Bill and Cheryl Brown noticed, however,that several recent trends converge to suggest the need for a company liketheirs. First, the number of people getting married who have been marriedbefore has increased dramatically. Second, because these individuals tendto be older than people marrying for the first time, they often have greaterfinancial resources. Another, and seemingly unrelated trend is that

learningobjective 3

Describe the process

perspective of entre-

preneurship, and list the

major phases of this

process.



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older people in many societies seem increasingly willing to‘‘indulge’’ themselves—they do not want to miss out onexperiences simply because they are in their forties or fiftiesinstead of their twenties and thirties. At first glance, these trendsand events might seem to be unrelated, but when consideredtogether, a striking pattern emerges: Millions of people in theUnited States who need help planning their second or thirdwedding. The idea for Second Time Around was suggested bythis emergent pattern, and the company provides a clearillustration of how diverse events and trends can combine toproduce a new and potentially profitable business opportunity.

n Deciding to Proceed and Assembling the Essential Resources:Having an idea for a new product or service or recognizing anopportunity is only, of course, the first step in the process. Atthat point, an initial decision to proceed—to do something activeabout the idea or opportunity—is required. As Shane, Locke,and Collins suggest, the entrepreneurial process occurs becausespecific individuals make this decision and act upon it.18 So, intheir view, understanding entrepreneurs’ motives is crucial tocomprehending the entire process. Deciding to start a business isone thing; actually doing so is quite another, and would-beentrepreneurs quickly discover that they must assemble a widearray of required resources: basic information (about markets,

competitors, environmental and legal issues), human resources (partners,initial employees), and financial resources. Gathering these resources is oneof the most crucial phases of the entrepreneurial process, and unless it iscompleted successfully, opportunities, no matter how attractive, or ideasfor new products and services, no matter how good, ‘‘die on the vine,’’ soto speak. It is at this stage, and especially when seeking financial backing,that entrepreneurs typically prepare a formal business plan—a detaileddescription of how they plan to develop their new venture. (Assembly ofrequired resources will be covered in Chapters 4–8.)

n Launching a New Venture: Once the required resources are assembled,the new venture can actually be launched. Doing so involves a wide rangeof actions and decisions: choosing the legal form of the new venture,developing the new product or service, establishing the roles of the topmanagement team, and so on. Sadly, many new entrepreneurs do not fullygrasp the complexities of starting a new venture, and as we will note inlater chapters, this can burden them with problems that could, in fact,have been avoided. (The issues involved in actually launching a newventure will be covered in Chapters 8–11).

n Building Success and Managing Growth: Although moving from an ideato an actual, going concern represents major progress, it is just the start ofanother key phase in the entrepreneurial process: running the new ventureand building it into a growing, profitable business. Many entrepreneursrecognize that this phase requires additional financial resources. However,in our experience, a smaller proportion fully recognizes the importance oftwo key factors in the process: developing effective strategies forencouraging and managing growth, and management issues relating togrowth (e.g., being able to attract, motivate, and retain high-qualityemployees; building effective relationships among founders of the newventure). We cover both of these aspects of building growth in Chapters 12and 13.

n Harvesting the Rewards: In this final phase, founders choose an exitstrategy that allows them to harvest the rewards they have earned throughtheir time, effort, and talents. Individual entrepreneurs must choose

Co

urt

esy,

Tw

ice

isN

ice

En

co

reB

rid

al

Cre

atio

ns

LL

C

Figure 1 .6

‘‘Connecting the Dots’’ To

Recognize New Business

Opportunities

Opportunities for new venturesoften emerge out of changes in awide range of economic,technological, governmental, andsocial factors. Even though thesetrends and changes may seem, atfirst glance, to be unrelated,successful entrepreneurs perceivemeaningful patterns that point topotentially profitable businessopportunities. This was certainlytrue for Bill and Cheryl Brown whorecognized the fact that millions ofpeople in the United States whoare getting married for the secondor third time might need the helpof a wedding service specificallyfocused on their needs. Thecompany they founded, TheSecond Time Around, has beenhighly successful.



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carefully among the many ways of reaping the benefits of successfulentrepreneurship (see Chapter 14) so as to maximize the benefits they gainfrom, in many cases, years of sacrifice and commitment.

One additional comment: We do not mean to imply here that entrepreneurshipcan be readily divided into neat and easily distinguished phases. In fact, theprocess is far too complex for that to be true. But the activities just describeddo tend to unfold over time in an orderly sequence, with idea generation oropportunity recognition occurring first, an active decision to proceed, next,and so on. We believe that viewing entrepreneurship in this manner offersseveral benefits. First, it helps avoid a static view of entrepreneurship—onethat sees it as a specific act (launching of a new venture) that occurs and is thencomplete. Such a view ignores the fact that entrepreneurs face an ever-changing array of tasks and challenges, and that they often think and feeldifferently about these tasks and challenges as they change and unfold.

Second, viewing entrepreneurship as an ongoing process draws attentionto the key activities entrepreneurs must perform as they proceed with theirefforts to convert ideas for new products or services into successful businesses.How well entrepreneurs perform these activities is often more central to theirsuccess than their personal characteristics or background—although, of course,these are important, too.19 Attention to the tasks entrepreneurs perform, inturn, gives us a good handle on identifying the skills, knowledge, andcharacteristics they need to function effectively in this role. So from this angle,too, a process perspective is useful. Finally, viewing entrepreneurship as aprocess suggests very strongly that different factors may affect it at differentpoints in time, and that the effects or importance of specific factors may wellchange over the course of new venture creation. For example, consider thequestion of whether entrepreneurs are more ‘‘risk prone’’ than other people—aquestion that has received a great deal of attention in recent years. Someresearch findings suggest that entrepreneurs are indeed ‘‘riskier’’ than otherpeople,20 while other findings from equally careful research point to theopposite conclusion—that entrepreneurs are less willing to take risks than othergroups, such as managers.21 How can both findings be true? One possibility isthat whether entrepreneurs are more or less risk-prone than other peopledepends on which phase of the entrepreneurial process we are considering. Forinstance, early on, entrepreneurs must, almost by definition, be relativelywilling to accept risk: If they were not, they would never give up secure jobs tostart new ventures. But later on, once they have launched a new venture andmust pay bills, meet payrolls, and manage limited resources, they may shifttoward becoming much less accepting of risk. In essence, entrepreneurs’behavior—and the role of risk in their decisions and strategies—may changeconsiderably over the entrepreneurial process. Recent findings suggest that asthis logic suggests, the impact of many factors on entrepreneurs’ behavior andsuccess does indeed change over the course of new venture creation.22 Anoverview of the major phases of new venture creation is shown in Figure 1.7;please examine it carefully, because it provides a basic framework forunderstanding much of what follows in later chapters.

Levels of Analysis: Micro Versus Macro RevisitedUntil recently, considerable disagreement existed in the field of entrepreneur-ship over the following question: In studying the entrepreneurial process,should we focus primarily on the entrepreneur (e.g., this person’s skills,abilities, talents, motives, traits—and perhaps, as we’ll explain in a latersection, even biological or genetic factors23), or primarily on the economic,technological, and societal context in which the entrepreneur operates(economic and market conditions, government policy, etc.)? As you can



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guess from our earlier comments on the macro/micro issue, we view thisquestion as largely irrelevant. We believe that at every stage of theentrepreneurial process, individual-level (i.e., micro) variables, group orinterpersonal-level variables, and societal-level (macro) variables all play arole (please refer again to Figure 1.7.)

For instance, consider the question of opportunity recognition. Certainly,this crucial process occurs in the minds of specific individuals and must,therefore, reflect the impact of individual-level variables such as the existingknowledge structures and the unique life histories of these individuals. Butnothing that has to do with people—not even basic aspects of cognition—occurs in a social vacuum. The kind of ideas people generate reflect the timesin which they live, the current state of technological knowledge, and manyother aspects of the societies. Further, other people with whom the entrepre-neur has contact—friends, associates, or even figures in the mass media—oftensuggest the basis of an idea for a new product or service. For instance, recentfindings indicate that entrepreneurs who have a mentor—an older and moreexperienced person with whom they work and who influences their career—tend to recognize more opportunities than entrepreneurs who do not enjoy thebenefits of having a mentor.24 In short, all three levels of analysis (individual,group, societal) are relevant and must be considered in order to understandidea generation fully.

Here’s another example of the importance of considering both micro andmacro factors (individual-level, group-level, and societal-level variables) inour efforts to understand entrepreneurship: Why do some individuals, but notothers, choose to become entrepreneurs? Again, all three categories ofvariables play a role. With respect to individual factors, some individualshave higher energy, are more willing to accept risk, and have greater self-confidence (self-efficacy) and greater tolerance for stress than others; thosehigh on these dimensions—and especially self-efficacy25—are probably morelikely to choose the entrepreneurial role.26 Direct evidence for the role ofindividual-level factors in choosing to become an entrepreneur is provided bymany studies. Among these studies, one of the most unusual27 compared thelevels of testosterone shown by male MBA students who had previouslystarted new ventures and those who had not. Results indicated that those whohad previously chosen to become entrepreneurs had higher levels of this male

Idea for New Product or Service and/or

Opportunity Recognition

Individual-Level Variables (skills, motives, characteristics of entrepreneurs)Group-Level Variables (ideas, input from others; effectiveness in interactions with venture capitalists, customers, potential employees)Societal-Level Variables (government policies, economic conditions, technology)

Initial Decision to Proceed

Assembling the Required Resources (information,

financial, people-related, etc.)

Actual Launchof NewVenture

Building a SuccessfulBusiness

Harvesting theRewards

(exit by founders)

Time

All phases are influenced by these three levels of variables

Figure 1 .7 Entrepreneurship as a Process: Some Key Phases

The entrepreneurial process unfolds over time and moves through a number of different phases. Events and outcomes during each phaseare affected by many individual-level, group-level, and societal-level factors.



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hormone! Further evidence suggested that this difference stemmed from agreater tendency toward risk on the part of the entrepreneurs, at least early inthe process.

The Possible Role of Genetic and Other Biological Factors:The ‘‘Micro’’ Perspective Carried to the Limit

The findings we just described, surprising as they may be, are actually relatedto a suggestion you may well find even more provocative—the idea thatgenetic or biological factors, too, may play a role in entrepreneurship! Howcan this be? The authors who propose this idea28 note that genetic factors havebeen found to play a role in several tendencies and predispositions that havebeen found, in turn, to be closely related to entrepreneurship. For instance, agenetic component is a factor in how individuals’ brains react to high levels ofrisk; some people find such conditions more pleasant or acceptable than othersbecause, in part, they have genetically inherited tendencies to respondpositively or negatively to risk. Some enjoy it, while others dislike it, which, inpart, reflects differences in how their brains function.

Similarly, genetic factors play a role in how people react to overcomingobstacles or to engaging in the same activities for a long period of time. Thesefactors, too, have been found to be related to entrepreneurship: Entrepreneursshow greater persistence than most people in overcoming obstacles and inengaging in the same activity for long periods of time.29 Third, it is wellestablished that genetic factors play a role in the development of specific skillsor abilities. These skills and abilities, in turn, lead individuals to pursue differentkinds of careers and to seek employment in different industries. For instance,people with high mathematical or quantitative abilities may choose to work intechnical or scientific fields. Because these areas offer greater opportunity forengaging in entrepreneurship than other fields or industries, the likelihood thatsuch individuals will become entrepreneurs is enhanced. So, through thisindirect route, genetic factors can influence entrepreneurship. We couldcontinue because several other factors found to play a role in entrepreneurshipare ones that are determined, at least in part, by genetic factors.30

Please don’t misunderstand: There is no suggestion here that geneticfactors directly lead individuals to become entrepreneurs. Rather, the basicidea is that genetic and biological factors predispose individuals to developcertain characteristics, skills, or preferences, which in turn lead them to bemore or less attracted to the kind of activities entrepreneurs perform and thekinds of environments in which they operate (see Figure 1.8). This intriguingpossibility is just now becoming the focus of careful research. Stay tuned: Thefindings promise to be both interesting and surprising.

Group-Level and Societal-Level Factors

Turning to group-level factors, it seems possible that individuals who receiveencouragement from friends or family members and those who have been

Preference forCertain Kinds

of Activities andEnvironments

Entrepreneurship

The Developmentof Various

PredispositionsCharacteristics,

PreferencesGeneticFactors

Development ofVarious Skillsand Abilities

Source: Based on suggestions by Nicolaou and Shane, 2006; see note 23.

Figure 1 .8

Are Entrepreneurs ‘‘Born’’? The

Possible Role of Genetic Factors

in Entreprneurship

Recently, it has been proposed thatgenetic factors may play a role inentrepreneurship. One mechanismthrough which genetics may exertsuch effects is indirect in nature.Genes have been found to stronglyinfluence several characteristics—personal dispositions that havealso been shown to increases thelikelihood that people will becomeentrepreneurs. In essence, then,some individuals may bepredisposed to becomeentrepreneurs by their own geneticnature.



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exposed to entrepreneurs in their own lives are more likely to proceed thanones who do not receive encouragement and have not been exposed to modelsof entrepreneurs. For instance, when Enron, a huge energy company based inHouston imploded as a result of a series of accounting scandals (October2001), members of the local business community feared that a large number ofhighly talented people would leave the Houston area. To keep them around,they organized Resource Alliance Group, a company whose sole mission wasthat of helping former—and highly talented—Enron employees to becomeentrepreneurs. They succeeded to an amazing degree: Within just threemonths, they had helped 25 senior Enron employees to found new ventures.Just a few short years later, several of these companies became profitable andwere adding good jobs to the Houston-area economy. So clearly, group-level(i.e., social) factors such as help and encouragement from others can play a keyrole in the entrepreneurial process.

Societal-level factors, too, are important. Individuals who come fromcertain social and economic backgrounds, or who live in countries wheregovernment policies are favorable to starting new ventures, are more likely tochoose this role than individuals from other backgrounds or who live in othercountries. We could continue with other examples, but by now, the main pointshould be clear: Individual-level, group-level, and societal-level factorsinfluence every action and every decision taken by entrepreneurs during all phasesof the entrepreneurial process. Taking note of this fact, we will employ all threelevels of analysis throughout this text. Although this approach addscomplexity to our discussions of many topics, it will also offer a morecomplete, accurate, and useful picture of what we know about the process ofentrepreneurship and how, perhaps, it can be made to run more smoothly forentrepreneurs. If those are not the ultimate goals of any text, then we, asauthors, researchers, and entrepreneurs, have no idea as to what they should be!

Entrepreneurship: The Intersection of ValuableOpportunities and Enterprising IndividualsSeveral years ago, one of us (Robert Baron) had the honor of introducing ahighly successful entrepreneur, Mukesh Chatter, at a banquet held in hishonor. (Mr. Chatter was receiving the ‘‘Entrepreneur of the Year’’ award givenannually by Prof. Baron’s university, and had just sold his company to LucentTechnologies for almost one billion dollars.) During his acceptance speech,Mr. Chatter made the following remarks:

Success comes from many sources. Yes, you have to recognize an opportu-nity. . . . But to recognize it, it has to be there in the first place—somethingmust have changed so as to generate the opportunity. After that, you have torecognize it and be able to tell that it is a good one—something you can turninto a successful business. Luck definitely plays a role; you have to be in theright place at the right time and know the right people who can help you. Butafter that, it’s largely a matter of hard, mind-bending work; if you are notwilling to put in the hours and give up lots of other things in your life, youwon’t succeed—you won’t make it happen.

We view these remarks as highly insightful. In just a few sentences,Mr. Chatter captured another key theme in entrepreneurship—and this book.Briefly stated, this theme suggests that it is the intersection of valuableopportunities and enterprising individuals that is the essence of entrepreneur-ship. Opportunities, as Mr. Chatter pointed out, are generated by changingeconomic, technological, and social conditions; but nothing happens withrespect to these opportunities until one or more energetic, highly motivatedindividuals recognizes them and the fact that they are worth pursuing. This is

learningobjective 4Explain why entrepreneurship

can be viewed as arising out of

the intersection of enterprising

people and opportunities.



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an important point: Opportunities vary greatly in their potential value, withthe result that only some are worth pursuing. In other words, only for someopportunities is the ratio of risk-to-potential benefits sufficiently favorable tojustify efforts to exploit them. As you have probably observed yourself, somebusiness opportunities are superior to others. They occur in industries that arefaster growing or ones in which customer needs are easier to identify orsatisfy. Further, some opportunities are easier to protect against competition.In Chapter 2, we carefully examine the specific characteristics that make someopportunities more promising than others. The key point we wish to makehere, however, should be obvious: At the very heart of entrepreneurship is anexus (connection) between opportunities and people (see Figure 1.9). It is thisconnection or intersection that starts the process—and sometimes changes theworld!

The Cutting Edge: EmergingIssues and QuestionsThere can be no doubt that entrepreneurs encounter change on a daily basiswhen starting and running their new ventures. In fact, in a sense, change iswhat entrepreneurship is all about: creating something new—profitable newventures—where none existed before, bringing new products and services tomarket, meeting new and emerging customer needs. As a field of study inbusiness, entrepreneurship reflects this basic reality. Partly because it drawson several different existing disciplines (strategy, organizational behavior,cognitive science, etc.), and partly because it is still quite new, it is literallyoverflowing with interesting issues and questions. To provide you with asense of the breadth this work, we’ll now highlight just a few of the topics thatmany researchers would view as ‘‘on the cutting edge’’—topics related toimportant aspects of the entrepreneurial process that have recently become thefocus of increased attention and study.

EntrepreneurshipNew BusinessOpportunities

EnterprisingIndividuals

(people willing toaccept risk, etc.)

Figure 1 .9

Entrepreneurship: What

Sometimes Happens When

Enterprising Individuals Meet

New Opportunities

What is the essential nature ofentrepreneurship? Shane (2003)suggests that it occurs whenindividuals willing to assume somerisk recognize new businessopportunities—and decide to acton them.

K E Y

P O I N T S

n Entrepreneurship is a process that unfoldsover time and moves through distinct butclosely interrelated phases.

n The entrepreneurial process cannot be div-ided into neat and easily distinguished stages,but in general, it involves generation of an ideafor a new product or service and/or recogni-tion of an opportunity, assembling the re-sources needed to launch a new venture,launching the venture, running and growingthe business, and harvesting the rewards.

n Individual, group, and societal factors influ-ence all phases of the entrepreneurial pro-cess. Thus, there is no reason to choosebetween a ‘‘micro’’ and a ‘‘macro’’ approachto entrepreneurship; both perspectives arenecessary.

n It is the nexus of valuable opportunities andenterprising individuals that is the essence ofentrepreneurship.

learningobjective 5

Understand why this

text will both describe

what entrepreneurs ac-

tually do and what, per-

haps, they should do!



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University-Based Technology Transfer: HowUniversities Encourage EntrepreneurshipUniversities are a prime source of new knowledge; in fact, providing it is oneof their most important roles. This suggests that they might also serve as the sourceof ideas for new products, services, means of production, and so on. In fact, thisidea is now widely accepted, with the result that many universities haveestablished technology transfer offices charged with the task of helping to movescientific and technological discoveries by faculty from the laboratory to themarketplace. To encourage this process, legislation adopted in the United States(the Bayh-Dole Act) has made it possible for universities to own patents oninventions that were developed under federal research grants, which support theresearch of individual scientists or teams of scientists. Has this legislationencouraged patenting by universities, and hence the commercialization oftechnological and scientific breakthroughs? This and related questions have recentlyreceived growing attention from entrepreneurship researchers. Results are mixed:overall, the Bayh-Dole Act has not generated an increase in patenting by universities.However, it has encouraged patenting in fields or areas where licensing is aneffective means of gaining new technical knowledge and generating revenue.31

Additional research on the role of universities in encouraging entrepreneurialactivities suggests that both the quality of faculty (e.g., to what extent are theyleaders in their field?) and the level of industry research funding received by auniversity are both important predictors of the number of start-up companiesformed on the basis of the discoveries of faculty research.32 Overall, then, agrowing body of evidence suggests that universities can indeed play an importantrole in encouraging entrepreneurship, with major benefits both to the universitiesand to society. It is not at all surprising, then, that studying this process iscurrently a topic of considerable interest in the field of entrepreneurship.

Incubators and Science Parks:Helping New Ventures GrowBy now, you may be wondering about the following question: How,specifically, do advances achieved in scientific research conducted atuniversities find their way into start-up ventures? Licensing, in which therights to patented inventions are granted to start-ups, is one important way.Another is through incubators and science parks, organizations focused on themission of encouraging business growth in a specific region by combining andsharing knowledge. The number of such centers in North America isincreasing rapidly, from only 12 in 1980 to more than 950 in 2002, and thisnumber continues to rise. Most incubators are associated with universities, butin Asia and elsewhere, science parks sometimes stand alone and are notclosely linked to a specific university. Both incubators and science parks aredesigned contribute to economic growth by nurturing young companies in aprotected environment—one in which start-up ventures can rent space atfavorable prices and benefit from the proximity of a large number of scientistsand engineers on the university’s faculty (see Figure 1.10).33 In fact, manysuccessful companies have come out of incubators and science parks. Forinstance, at Rensselaer Polytechnic Institute (RPI), the university where one ofus (Baron) works, many businesses that are now highly profitable and arepublicly traded on national stock markets were started in the university’sincubator. One such company, MapInfo, Inc., specializes in helping companiespinpoint locations for new branches, and in assisting governments to improvepublic safety and deal with security issues. A strong need for such servicesexisted, and the founders of MapInfo recognized and exploited it.

learningobjective 6Describe several issues and

questions about entrepreneur-

ship that are currently receiving

greater attention in the field

(e.g., university-based technol-

ogy transfer).



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Research is currently being conducted to deter-mine the best ways for incubators and science parks toachieve their primary mission of helping to moveadvances in science and technology into usefulproducts and services as quickly as possible.34

Incubators and science parks may well play anincreasing role in the founding of many new venturesin the future, so again, it is far from surprising thatstudying them is another ‘‘cutting-edge’’ topic inentrepreneurship research.

Entrepreneurial Cognition:A Look Inside the Mindof the EntrepreneurAre entrepreneurs a ‘‘breed apart’’—different from other people in importantways? Most people—including many entrepreneurs—believe that they are. Yet,early efforts to identify the characteristics or behaviors that make entrepreneursunique generally yielded weak and inconsistent findings. Do these results meanthat almost anyone can fill this role and start a successful new venture?Probably not; in fact, we feel that trying to understand entrepreneurshipwithout understanding entrepreneurs is like trying to bake bread without yeast.Entrepreneurs are the active component and must, in one sense, be central tothe entire process. But what is it about entrepreneurs that is crucial? Theirmotives? Skills? Abilities? Experience? Growing evidence suggests that allof these factors are important,35 but perhaps the most impressive researchconcerning entrepreneurs to date has focused on entrepreneurial cognition—howentrepreneurs think, reason, make decisions, and perform many other cognitiveactivities.36 Growing evidence suggests that entrepreneurs may indeed differfrom other people with respect to many aspects of cognition. For instance, theymay perceive risk differently—perhaps as more tolerable or not as great—maybe more subject to some cognitive errors (e.g., a tendency to be overlyoptimistic), may be more capable of recognizing connections or patterns inseemingly unrelated events or trends (and hence, better at recognizingopportunities), and more likely to think long and hard about unexpected orsurprising events or outcomes.37 Moreover, successful entrepreneurs, ascompared to less successful ones, may have better mental frameworks foridentifying good opportunities than other individuals—frameworks that aremore complete and accurate—and take into account practical matters such asspeed of revenue generation and solving customers’ problems.38

These possibilities are just the ‘‘tip of the iceberg’’ where the study ofentrepreneurial cognition is concerned, but we hope the main point is clear:Insights into how entrepreneurs think about opportunities, markets, risk,competitors, their companies, and many other topics can greatly increase ourunderstanding of how the entrepreneurial process unfolds. For this reason,entrepreneurial cognition, too, is a ‘‘cutting edge’’ topic in the field ofentrepreneurship at the present time.

We should hasten to add that many other topics and issues are alsoreceiving a great deal of attention at the present time. The ones we presenthere merely illustrate the broad range of diverse and intriguing issues that arecurrently in the forefront of entrepreneurship research. Needless to say, we’lldiscuss these and many other cutting-edge topics in the remaining chapters ofthis book as consistent with our view that we should present not simply adescription of what entrepreneurs do, but also guidelines for what they shoulddo based on the most up-to-date knowledge of our field.

Figure 1 . 10

Incubators and Science Parks:

Encouraging Economic Growth

Through Entrepreneurship

All over the world, the number ofincubators and science parks isincreasing rapidly. Theseorganizations seek to enhanceregional or even national economicgrowth by providing start-upventures with a protectedenvironment—one in which theycan benefit from reduced costs andthe proximity of many scientistsand engineers. Shown here is theincubator center at RensselaerPolytechnic Institute—one of thefirst incubators in the UnitedStates—that continues to supportstart-up companies based onresearch by faculty or current andformer students.

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Sources of Knowledge AboutEntrepreneurship: How WeKnow What We KnowIn the remaining chapters of this book, we will discuss many aspects ofentrepreneurship—how opportunities arise, how some people recognize them,why some means of developing opportunities are better than others (at least insome contexts), why some entrepreneurs are successful while others fail, andso on. As we discuss each of these issues, we will present the most accurateand up-to-date information available. This goal, in turn, raises an importantquestion: How do we know which information is the most accurate anduseful? As any visit to a local bookstore will suggest, many potential sources ofinformation about entrepreneurship exist, with no shortage of self-proclaimedexperts on this topic. So how have we chosen the information to include in thisbook? The answer is straightforward: We have selected information that hasbeen gathered in accordance with a set of rules or methods for acquiringreliable knowledge—methods that prove extremely helpful in many fieldsranging from the physical sciences on one hand, through various branches ofmanagement on the other. What are these methods, and can they really beapplied to the study of entrepreneurship? The methods themselves are quitecomplex and well beyond the scope of this brief discussion; but their essentialnature was stated concisely by the French philosopher Diderot (1753) morethan 250 years ago:

There are three principal means of acquiring knowledge: observation,reflection, and experimentation. Observation collects facts; reflectioncombines them; experimentation verifies the result of that combination. . . .

That these methods can be used to study entrepreneurship is stronglysuggested by the fact that they are currently being employed in a large volumeof entrepreneurship research. Since this is the case, and since much of theinformation presented in this text has been gathered through these methods,we will describe them briefly here. Our goal is certainly not that of turning youinto an entrepreneurship researcher; on the contrary, it is simply to provideyou with a basic understanding of these methods so that you can becomea more informed consumer of knowledge about entrepreneurship, decidingfor yourself whether, and to what extent, alleged ‘‘facts’’ about it are reallyaccurate.

K E Y

P O I N T S

n The field of entrepreneurship is broad inscope and reflects the wide range of factorsthat affect the founding and success of newventures.

n One topic receiving a great deal of currentattention is university-based technologytransfer—the ways in which universities some-times encourage entrepreneurial activities byfaculty members and others.

n Another, closely related topic is the role ofincubators and science parks—organizations that seek to encourage

economic development in a region by en-couraging the sharing of knowledge. Incuba-tors are associated with universities, whilescience parks may be entirely independent.

n Recent research has also attempted tounderstand the ways in which entrepreneursthink, reason, and make decisions: entrepre-neurial cognition. Findings indicate that en-trepreneurs do indeed think differently inseveral respects, and that their cognitiveprocesses often play a key role in the foundingand success of new ventures.

learningobjective 7Explain why certain sources of

knowledge about entrepreneur-

ship are more reliable and useful

than others.



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Observation, Reflection, and Experimentation:Alternative Routes to KnowledgeBecause it is the method most frequently used to study entrepreneurship, we’llstart with systematic observation. The basic idea is straightforward: Weobserve certain aspects of the world systematically, keeping careful records ofwhat we notice. Then, we use this information as a basis for reachingconclusions about the topics we wish to study—and understand. For example,suppose that a researcher is interested in increasing our knowledge ofopportunity recognition—the process through which entrepreneurs identifyopportunities for profitable new businesses. Imagine that this researcher hasreason to believe that opportunity recognition involves noticing or recognizingpatterns—connections between seemingly unrelated events, changes, or trends.In other words, recognizing opportunities involves ‘‘connecting the dots’’between such factors as advances in technology, changes in markets, shifts ingovernment policies, and other factors so as to form a recognizable pattern.39

The patterns entrepreneurs detect then point to opportunities for newventures. For instance, do you recall our discussion of Expedia.com? In thatdiscussion we pointed out that the idea for this new business involvedconnecting several independent events and trends—the growing number ofindividuals with personal computers, the development of secure means formaking purchases online, deregulation of the airline industry—whichproduced huge variations in ticket prices. This basic process—perceivingconnections between various events and trends—may play a role in theidentification of many opportunities.

How would a researcher study this basic idea? One way to do so wouldinvolve deriving from this reasoning one or more hypotheses, as yet untestedpredictions or explanations for a set of facts, and then proceeding to test thesepredictions by collecting relevant data. For instance, the researcher mightreason that if recognizing patterns plays a key role in opportunity recognition,then the broader or more varied the work experience individuals have, thebetter they will be at recognizing opportunities. Why? Because broadexperience helps individuals perceive connections between seemingly inde-pendent events or trends. To test this idea, the researcher might then obtaininformation on two variables—aspects of the world that can take differentvalues. One variable would be the breadth of work experience individualshave had (from very narrow to very broad) and the other would be thenumber of opportunities they have recognized (perhaps, the number ofcompanies they have started or the number of patents they have received—this variable could potentially be measured in several different ways). Theresearcher might then predict that these two variables will be correlated,where changes in one are accompanied by changes in the other. Specifically,she might predict that the more varied individuals’ work experience, the moreopportunities they will recognize or the greater the number of companies theywill start. Correlations can range from �1.00 to þ 1.00. Negative numbersindicate that as one variable increases, the other decreases. Positive numbersindicate that as one increases, so does the other. So in this case, the researcherwould predict a positive correlation between breadth of work experience andnumber of opportunities recognized.

learningobjective 8

Describe the nature of

three basic means for

obtaining knowledge

about entrepreneurship—

systematic observation,

the case method, and

experimentation—and the

role of theory in the field

of entrepreneurship.

Research conducted in this manner can, and often does, add much to ourunderstanding of entrepreneurship. In fact, there is simply no substitute forcareful research if we really want to understand how the entrepreneurialprocess unfolds and what factors influence it. All the ‘‘educated guesses’’offered by self-proclaimed ‘‘experts’’ on entrepreneurship are not, in our view,nearly as informative as the findings of careful research. (By the way, actualresearch on this topic suggests that in fact, breadth of experience is positivelyrelated to opportunity recognition.)40



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The Case Method

Systematic observation is an important method of research inentrepreneurship, and perhaps the one most frequently used, butit is certainly not the only one. Another involves what Diderotdescribed as reflection. In entrepreneurship research, thisapproach is the basis for the case method, which involvesgathering large amounts of data about one organization orspecific individuals, and then using this information to reachconclusions about what factors influenced important outcomessuch as economic success. How could this method be used toinvestigate opportunity recognition? One possibility is to gatherdetailed information on famous entrepreneurs, to determinewhether they recognized important opportunities by ‘‘connectingthe dots’’ between various events and trends. As an example,consider Chester Carlson, the individual credited with inventingthe modern copy machine and laser printers (see Figure 1.11).

At the time he invented (or rather, adapted) the basicprocess used in copy machines (and in laser printers), the needfor better means of making copies, especially in business andeducational settings, was clear. During the 1940s and 1950s,many products for making copies had been invented, but noneseemed to work very well. Why, then, was Chester Carlson ableto come up with one that worked well? Careful study of hisbackground and life suggest some intriguing possibilities. First,he held both a law degree and a technical degree. As a result,he understood both the strong need for improved means ofmaking copies as well as several of the technical processes that

might be used to meet this need. Further, once he decided to try to solve thisproblem, he restricted his efforts (i.e., search) to technologies and processes heunderstood well. By focusing on these processes, he may have enhanced hisown ability to perceive ways of connecting several processes into a means ofmaking dry, permanent copies. In other words, a detailed case study ofCarlson’s activities offers support for the hypothesis that opportunityrecognition does indeed involve perception of complex patterns. Moreover,using the case method also suggests that often those individuals who possessthe ‘‘cognitive equipment’’ needed to perceive such patterns are the ones whothen become highly successful entrepreneurs.

We should hasten to add that the case method, by itself, does not in anysense prove that this is so. Findings obtained through the case method areoften highly valuable and can offer useful insights into how complex processesoccur. But since they often rely on somewhat informal means and on thejudgment and intuition of researchers, they provide a different kind ofknowledge than systematic observation or another method we will nowdescribe—experimentation.

In essence, experimentation involves systematically changing one variablein order to see whether such changes affect one or more other variables. Notethat this approach involves active interventions by the researcher; insystematic observation, in contrast, the researcher merely observes thevariables of interest without attempting to change them. Similarly, in thecase method, a researcher observes the people or companies of interest andmakes no attempt to change them in any way.

Experimentation: Knowledge Through Intervention

When it is conducted carefully, and in accordance with certain basic rules,experimentation is a powerful tool. The reasoning behind it is impeccable: Ifwe change one variable while holding everything else constant, and these

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Figure 1 . 11

Chester Carlson: A Case Study in

Entrepreneurship

Why was Chester Carlson able tocome up with a practical and cost-effective technology for makingdry, permanent copies—aninvention with far-reachingeffects? Detailed study of his lifeand activities through the casemethod offers some intriguingpossibilities and in this way, shedsimportant new light on the basicnature of opportunity recognition.



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changes affect another variable, we can conclude that changes in the first causechanges in the second. Can this method actually be used to studyentrepreneurship? In many instances, not very readily, because researcherssimply cannot change many variables that are of interest to them. For instance,they cannot alter government policies or demographic trends, or changeamount of capital available in economic markets. But in some contexts—especially in research relating to the behavior of individual entrepreneurs—itis possible to use experimentation. For example, consider, again, the possibilitythat recognizing opportunities involves ‘‘connecting the dots’’ betweenseemingly unrelated events or trends so that meaningful patterns emergeand point to ideas for new products or services. This suggestion could bestudied by experimentation. For instance, one group of individuals could begiven training in recognizing patterns—that is, they would be trained intechniques that help in searching for and noticing patterns in complex eventsor trends. Another group, carefully matched to the first in as many respects aspossible (e.g., education, age, work experience), would not receive suchtraining. Then, both groups would be asked to read materials carefullydesigned to contain information that can becombined into patterns pointing to new businessopportunities. For instance, these materials couldbe based on new ventures that actually developedin the past, but about which the participants inthe study do not know. If recognizing patternsdoes indeed play a role in identifying opportu-nities, then the individuals given training inpattern recognition would be more successful atthis task than those not given such training (seeFigure 1.12).

We realize that this scenario may seem veryfar removed from the chaotic, ever-changingworld in which entrepreneurs normally operate.However, the purpose of experimentation is notto simulate or reproduce these conditions; rather,it is to gain insights into the nature of complexprocesses such as opportunity recognition—insights that cannot readily be gained throughthe case method or systematic observation.

Experimentation offers one additional impor-tant advantage: It is useful for establishingcausality. When changing one variable in anexperiment produces changes in another, it provides strong evidence thatthe first variable caused changes in the second. In the experiment we justdescribed, differences in the performance of the two groups (one with trainingin pattern recognition and the other without such training) would point clearlyto the potential role of ‘‘connecting the dots’’ in opportunity recognition.Moreover, this evidence would be stronger and more conclusive than thatobtained by other methods.

Because of practical constraints (e.g., it is difficult to vary the factors ofinterest systematically), experimentation is not often used in the study ofentrepreneurship. Instead, researchers employ a wide range of statisticaltechniques to help determine causality on the basis of other methods, such assystematic observation. One approach is to determine whether one variable orchange occurs before another. Something that occurs later in time cannotreasonably be the cause of something that occurred earlier. This concept, calledGranger causality, can be used to establish the direction of causality insystematic observation. So, for instance, suppose that research findingsindicate that the more varied individuals’ work experience, the more

0No Training

Training in Recognizing Patterns

Training

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Individuals Given Training Do Betterin Recognizing Opportunities

3

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Figure 1 . 12

Experimentation in

Entrepreneurship Research:

an Example

In the study illustrated here, onegroup of participants was giventraining in recognizing patternswhile the other was not. Whenboth groups then read materialscontaining potential opportunitiesfor new ventures, the group giventraining was more successful inrecognizing these opportunities.This research suggests thatrecognizing patterns in complextrends and changes may indeedplay an important role inopportunity recognition.



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opportunities they later recognize. Because work experience precedesrecognizing opportunities, it makes sense to conclude that the experienceproduced (caused) opportunity recognition. The opposite—that discoveringopportunities produces varied work experience—makes little or no sense.

In sum, there are several different methods for gathering useful—andaccurate—information about various aspects of entrepreneurship. None areperfect, but it is our strong conviction that all are very useful, and are greatlysuperior to the kind of informal, ‘‘shoot from the hip’’ approach taken in manypopular books on entrepreneurship. Don’t misunderstand: We do not mean toimply that the people writing such books are ill-intentioned or totally lackingin useful insights about the entrepreneurial process. Rather, we only wish tonote that the information they communicate is based almost entirely on theirown experience and other informal sources. Although these sources maysometimes provide important insights, they rest on less certain (i.e., reliable)foundations than information gathered through the use of systematic observa-tion, experimentation, or the case method. For that reason, we will emphasizeinformation gathered through those methods throughout this book.

Theory: Answering the Questions ‘‘Why?’’ and ‘‘How?’’We need to mention one more aspect of the quest for knowledge aboutentrepreneurship before concluding: the role of theory in this endeavor. Theterm theory has a special meaning in the realm of science. It refers to effortsto go beyond merely describing various phenomena to the point at which wecan explain them—understanding why and how they happen or take place asthey do. For instance, with respect to opportunity recognition, we don’t wantmerely to be able to state that some people are better at recognizingopportunities than others or to report the percent of people who are highlyskilled at this task: We want to be able to explain why they are better and howthey go about recognizing these opportunities. In other words, we want toknow just what it is about certain people that allows them to be so good atrecognizing opportunities, especially, perhaps, ones that other people miss. Aswe noted earlier, one such theory might involve the ability to perceivemeaningful patterns in diverse trends and events.

In sum, theories are frameworks for explaining various events orprocesses. Given the fact that the field of entrepreneurship has been inexistence for only a relatively short period of time, it is not surprising to learnthat it has few well-developed theories of its own; in fact, it has sometimesbeen criticized for lacking such frameworks.41 Up to this point in time,entrepreneurship has largely borrowed theories from other fields, such aseconomics, psychology, and cognitive science. For instance, efforts haverecently been made to apply prospect theory, a well-developed theory ofdecision making,42 to several important issues relating to entrepreneurship(e.g., the question of how entrepreneurs perceive risk)43 to answering thequestion above. On the other hand, there is a growing body of theorydeveloped specifically to help explain various aspects of the entrepreneurialprocess. For instance, one theory designed to explain why some family-ownedbusinesses are more successful than others, calls attention to the joint effects ofseveral factors, such as pay incentives for family members, their belief that thefirm will or will not be sold, and the extent to which family members know theshare of the business they will inherit. Offering family members pay incentives(e.g., year-end cash bonuses) is quite common, but whether, and to whatextent, doing so contributes to the company’s success is not yet clear. Thetheory just mentioned suggests that pay incentives for family members willenhance firm performance when these persons believe the business will besold but will not enhance performance when they believe the company willremain in the family. Why? Perhaps because when they believe the firm will besold, their feelings of commitment toward the family business are reduced,



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thus allowing greater latitude for the impact of economic factors such as payincentives.44 In situations like this, we say that the effects of one variable aremoderated by another variable. In this case, the effects of pay incentives arestrong when family members expect the business to remain with the family,but are weak when they expect that the business will be sold. In other words,the effects of pay incentives are moderated (changed, affected) by expectationsabout ownership of the business. We will encounter many instances in thisbook when one variable moderates the effects of another; that’s why weintroduce this concept here.

As you can see, theories are extremely useful because they help explainwhy certain events or processes occur as they do. For instance, as thepreceding example suggests, why pay incentives improve the performance offamily businesses under some circumstances but not under others. So, howare theories derived in the first place? Briefly, the process goes something likethe following:

1. On the basis of existing evidence or observations, a theory reflecting theevidence is proposed.

2. The theory, which consists of basic concepts and statements about howthese concepts are related, helps to organize existing information andmakes predictions about observable events. For instance, the theory mightpredict the conditions under which individuals recognize or do notrecognize opportunities.

3. These predictions, known as hypotheses, are then tested by actual research.

4. If results are consistent with the theory, confidence in its accuracy isincreased. If they are not, the theory is modified and further tests areconducted.

5. Ultimately, the theory is either accepted as accurate or rejected asinaccurate. Even if it is accepted as accurate, however, the theory remainsopen to further refinement as improved methods of research aredeveloped and additional evidence relevant to the theory’s predictionsis obtained. (Please see Figure 1.13 for a summary of these steps.)

Perhaps another concrete example will help clarify the importance oftheory. Suppose that on the basis of careful observations and existing findings,an entrepreneurship researcher formulates the following theory: Individuals

Figure 1 . 13

The Role of Theory in

Entrepreneurship Research

Theories both organize existingknowledge and make predictionsabout how various events orprocesses will occur. Once theoriesare formulated, hypothesesderived logically from them aretested through careful research. Ifresults agree with predictions,confidence in the theory isincreased. If results disagree withsuch predictions, the theory maybe modified or ultimately rejectedas false. Even if initial predictionsare confirmed, further tests of thetheory are generally required.

Theory about some aspect of entrepreneurship

Research designed to test these

predictions is conducted

Predictions are derived from

this theory

Predictions areconfirmed

Confidence inthe theory

is increased

Predictions aredisconfirmed

Theory isrejected

Theory ismodified

Confidence intheory is reduced

Additional researchdesigned to test other

predictions based on thetheory is conducted



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who choose to become entrepreneurs think differently, in various ways, frompeople who do not choose this role.45 Specifically, individuals who choose tobecome entrepreneurs are (1) more likely than others to be susceptible to severalkinds of cognitive errors or biases (e.g., they are more likely to be overlyoptimistic and to suffer from the illusion of control—they overestimate theirability to control the outcomes they experience, etc.), and (2) more likely thanothers to think about situations in terms of the gains they will give up if they donot launch a new venture, which, in turn, causes them to be more accepting ofrisk. These predictions are then formulated as specific hypotheses and tested inactual research. For instance, actual or would-be entrepreneurs could becompared with people who have no interest in starting new ventures in terms oftheir susceptibility to cognitive errors and their tendency to think about varioussituations in terms of losses. Measures of all these variables already exist andhave been used in previous studies, so designing research to test thesehypotheses is quite feasible. If results are consistent with predictions derivedfrom the theory, confidence in it is increased: there would be a stronger basis foraccepting the theory’s premise that entrepreneurs do indeed think differentlyfrom other people. On the other hand, if results are not consistent withpredictions derived from the theory, confidence in it is reduced.

Why should the field of entrepreneurship, which is eminently practical inorientation, be interested in theory? Because, as one social scientist remarkedmany years ago, ‘‘There is nothing as practical as a good theory.’’46 By thisstatement he meant that having a good theory—a clear understanding of whyor how a process occurs as it does—is very useful from the point of view ofintervening in it in beneficial ways. In other words, if we have good and well-verified theories about entrepreneurship, we will understand this process inways that enhance our ability to assist entrepreneurs in their efforts to startnew ventures. And that, of course, would be a very positive outcome. In short,developing good theories is more than an exercise in basic science: It is animportant step toward attaining valuable, practical results.

Two final points: First, theories are never proven in any ultimate sense.Rather, they are always open to testing and are accepted with more or lessconfidence depending on the weight of available evidence relating to them.Second, research should never be undertaken to prove or verify a theory; it isperformed to gather evidence relating to the theory. If a researcher sets out toprove her or his pet theory, the researcher commits a serious violation of themethods that should be followed to gather accurate information about anytopic. Why? Because in this case, the researcher may lose objectivity, and eitherunconsciously (or even consciously) design her or his research so that it tipsthe balance in favor of the theory. Clearly, any results obtained under theseconditions are on shaky ground.

K E Y

P O I N T S

n Many potential sources of knowledge aboutentrepreneurship exist, but the most accurateand reliable knowledge is provided by meth-ods found to be useful for this purpose inother fields: systematic observation, experi-mentation, and reflection.

n Systematic observation involves careful mea-surement of variables of interest in order todetermine whether they are related (corre-lated) in any orderly manner. To the extent theyare, one can be predicted from the other.

n In the case method, large amounts of infor-mation are gathered about one organization or

specific individuals, and this information isthen used to reach conclusions about whatfactors influenced important outcomes suchas economic success.

n Experimentation involves direct interventions:One variable is changed systematically inorder to determine whether such changesaffect one or more additional variables.

n Theory involves efforts to explain rather thanmerely describe various phenomena—tounderstand why and how they occur.Research is conducted to obtain data relevantto theories—not to prove them.



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A User’s Guide to This TextAlthough it is many years since we were students, we both remember thefollowing fact well: Not all textbooks are equally useful or easy to read. Somewere a pleasure to use, while others quite literally hurt our heads! Recallingthese experiences, we have done our best to make this book one of the goodones. Here is an overview of the steps we have taken to reach this goal.

First, we have included many reader aids. Each chapter begins with a list ofkey learning objectives: what you should know after you finish reading it. Withinthe text itself, important terms are printed in boldface type and are followedby a definition. These terms are also defined in a glossary at the end of eachchapter. To help you retain what you read, each major section is followed by alist of key points—a brief summary of major points covered in that section. Allfigures and tables are clear and simple, and most contain special labels and notesdesigned to help you understand them (see Figure 1.11 for an example). Finally,each chapter ends with a summary and review of the key points. Reviewing thissection can help you retain the information presented and help you to benefitmore from this course.

Second, the text contains three special features designed to make it moreuseful—and interesting. One is labeled Danger! Pitfall Ahead! These sections,which appear within each chapter rather than at the end, highlight potentialsnares and hazards of which entrepreneurs should be aware—ones that canprove fatal to their new ventures, and their dreams. Having been thereourselves, we are only too aware of these pitfalls, and think it is crucial that wecall them clearly to your attention.

The second special feature is labeled Qualifying Common Sense: What WeThink We Know About Entrepreneurship . . . And What We Really Do Know.These special sections provide vivid illustrations of the fact that, often,commonsense ideas about entrepreneurship are misleading. In addition, theyindicate how careful research has helped to correct or clarify many of thesemisconceptions. After reading these sections, you will have a much clearerunderstanding of why we can’t trust intuition or informal knowledge toprovide the full understanding of the entrepreneurial process we seek.

Each chapter is followed by one or more brief cases and by experientialexercises labeled Getting Down to Business. As this title suggests, theseexercises are designed to provide you with practice in using the informationpresented earlier in the chapter. Finally, it’s important to note that the chaptersfollow the timeline presented earlier in this chapter (refer to Figure 1.7). Thus,Part 1 (Chapters 1, 2, and 3) examines the field of entrepreneurship and whatis, perhaps, the start of the entire process: emergence and recognition ofopportunities. Part 2 (Chapters 4–7) focuses on assembly of the resourcesneeded to launch a new venture: information, financial, and people resources.Part 3 (Chapters 8–10) examines the actual launch of new ventures,considering such topics as the legal form of such ventures and strategy forsuccess. Part 4 (Chapter 11–12) focuses on key aspects of growth—issuesrelating to strategies for encouraging growth and management techniques andprocedures useful in obtaining it through effective management techniques(e.g., attracting, motivating, and retaining top-notch employees). Finally,Part 5 (Chapter 13) focuses on the logical conclusion to the entrepreneurialprocess: alternative ways in which entrepreneurs can harvest the rewardsof their efforts. In addition, the text ends with a unit on accounting forentrepreneurs. This module reviews key principles essential to entrepreneursin running a new venture.

One last word: As authors and teachers, we promise faithfully that we willnot lose sight of our major goals in writing this book: providing you with anaccurate and up-to-date overview of what we currently know about



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entrepreneurship as a process. In closing, we wish to add that we agree withthe English author Lady Mary Montagu who, in writing about personalwealth, once remarked: ‘‘ ’Tis a sort of duty to be rich, that it may be in one’s powerto do good. . . . ’’ We believe that successful entrepreneurs do indeed ‘‘do good’’:true, they add to their own wealth. But in addition, they do much more: Theproducts and services they bring into being improve the lives of countlessmillions of people; and on top of this, they are often extremely generous indonating substantial portions of their wealth to eminently worthy causes. Forinstance, a few years ago, one of us (Baron) visited the beautiful art museum inLos Angeles funded by the John Paul Getty Foundation (see Figure 1.14). Whata gift to all humanity! And both of us work in Schools of Management that arenamed after the entrepreneurs who made generous donations to support themand the universities in which they are located. If this book helps emergingentrepreneurs to succeed in attaining their dreams—and therefore enhancestheir ability ‘‘to do good’’ with the wealth they acquire—we will feel that asauthors, we have done our part.

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Figure 1 . 14

Entrepreneurs: Key Contributors

to Society

Entrepreneurs do not merely addto their own personal fortunes;they often also improve the livesof millions through the newproducts and services they bringto market. Moreover, they oftenmake generous donations toworthy causes. For instance, thebreathtakingly beautiful GettyMuseum, located outside LosAngeles, was funded by a gift ofseveral billion dollars from theJohn Paul Getty Foundation.

S U M M A R Y

& R E V I E W

O F K E Y

P O I N T S

n Entrepreneurship, as a field of business,seeks to understand how opportunities tocreate new products or services arise andare discovered or created by specificindividuals, who then use various meansto exploit or develop them, thus produc-ing a wide range of effects.

n In recent years, the allure of entrepreneur-ship has increased, with the result thatmore people than ever before are choos-ing this activity as a career.

n Entrepreneurship, as a branch of busi-ness, has important roots in economics,behavioral science, and sociology.

n The field of entrepreneurship recognizesthat both the micro perspective (whichfocuses on the behavior and thoughts of

individuals) and the macro perspective(which focuses primarily on environmentalfactors) are important for obtaining a fullunderstanding of the entrepreneurialprocess.

n This book will not simply describe whatentrepreneurs do (common practice); itwill go further and describe actions andprocedures entrepreneurs can perform toincrease the likelihood that their compa-nies will succeed.

n Entrepreneurship is a process that un-folds over time and moves through dis-tinct but closely interrelated phases.

n The entrepreneurial process cannot bedivided into neat and easily distinguishedphases, but in general, it involves generation



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GlossaryBusiness Plan: A detailed description of the entrepre-

neur’s vision for converting ideas into a profitable,going business.

Case Method: A research method in which large amountsof data about one organization or specific individualsare gathered and then used to reach conclusionsabout what factors influenced important outcomes,such as economic success.

Experimentation: A research method in which onevariable is systematically changed in order to deter-mine whether such changes affect one or moreother variables.

Hypothesis: An as-yet untested prediction or explana-tion for a set of facts.

Intrapreneurs: Individuals who create something new,but inside an existing company rather than throughfounding a new venture.

Macro (Perspective): A ‘‘top-down’’ perspective thatseeks to understand the entrepreneurial processby focusing largely on environmental factors (i.e.,

economic, financial, political) that are largely beyondthe direct control of an individual.

Micro (Perspective): A ‘‘bottom-up’’ perspective that seeksto understand the entrepreneurial process by focusingon the behavior and thought of individuals orgroups of individuals (e.g., founding partners).

Opportunity: The potential to create somethingnew (new products or services, new markets, newproduction processes, new raw materials, newways of organizing existing technologies, etc.) thatemerges from a complex pattern of changingconditions—changes in knowledge, technology,economic, political, social, and demographicconditions.

Systematic Observation: A research method in whichcertain aspects of the world are observed system-atically and careful records kept of what isdetected. This information is then used as a basisfor reaching conclusions about the topics underinvestigation.

of an idea for a new product or service and/orrecognition of an opportunity, assembling the resourcesneeded to launch a new venture, launching the venture,running and growing the business, and harvestingthe rewards.

n Individual, group, and societal factors influence allphases of the entrepreneurial process. Thus, insteadof choosing between a ‘‘micro’’ and a ‘‘macro’’approach to entrepreneurship, both perspectivesare necessary.

n It is the nexus of valuable opportunities and enterpris-ing individuals that is the essence of entrepreneurship.

n The field of entrepreneurship is broad in scope andreflects the wide range of factors that affect thefounding and success of new ventures.

n One topic receiving a great deal of current attentionis university-based technology transfer—the ways inwhich universities sometimes encourage entrepre-neurial activities by faculty members and others.

n Another, and closely related topic, is the role ofincubators and science parks—organizations thatseek to encourage economic development in a regionby encouraging the sharing of knowledge. Incubatorsare associated with universities, while science parksmay be entirely independent.

n Recent research has also attempted to understandthe ways in which entrepreneurs think, reason, andmake decisions: entrepreneurial cognition. Findings

indicate that entrepreneurs do indeed think differentlyfrom other people in several respects, and that theircognitive processes often play a key role in thefounding and success of new ventures.

n Many potential sources of knowledge about entre-preneurship exist, but the most accurate and reliableknowledge is provided by methods found to be usefulfor this purpose in other fields: systematic observa-tion, experimentation, and reflection.

n Systematic observation involves careful measurementof variables of interest in order to determine whetherthey are related (correlated) in any orderly manner. Tothe extent they are, one can be predicted from theother.

n In the case method, large amounts of information aregathered about one organization or specific individ-uals, and this information is then used to reachconclusions about what factors influenced importantoutcomes such as economic success.

n Experimentation involves direct interventions: Onevariable is changed systematically in order to deter-mine whether such changes affect one or moreadditional variables.

n Theory involves efforts to explain rather than merelydescribe various phenomena—to understand why andhow they occur. Research is conducted to obtaindata relevant to theories—not to prove them.



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Technology Transfer Offices: Departments at univer-sities charged with the task of helping to movescientific and technological discoveries by facultyfrom the laboratory to the marketplace.

Theory: Refers to effort to go beyond merely describingvarious phenomena and, instead, to explain them.

Variables: Aspects of the world that can take differentvalues.

Questions for Discuss ion1. What is the difference between an inventor and an

entrepreneur?

2. Suppose that the government passed a series oflaws that made it much more difficult to start anew business. What effect(s) do you think suchlaws would have on the economy?

3. One basic question in the field of entrepreneur-ship is: ‘‘Why do some people leave secure jobsand lives to become entrepreneurs?’’ How wouldyou study this issue from the micro perspective?From the macro perspective?

4. In this chapter, we suggested that entrepreneursare the new heroes and heroines in manycultures. Do you think they are? If so, why doso many people see entrepreneurs as being

heroic? If you think this suggestion is not accu-rate, why?

5. Do you think that universities should ownpatents for inventions or scientific advancesmade by faculty members? Why or why not?

6. Suppose you came across an article in a magazinewith the following title: ‘‘First-Borns Make theBest Entrepreneurs.’’ Reading the article, youdiscover that it contends that entrepreneurs whoare the oldest child in their family are moresuccessful than ones who are the second or thirdborn. What questions should you ask yourselfabout how this information was obtained in orderto decide whether to view it as accurate or valid?

G e t t i n g D o w nT O B U S I N E S S

Becoming an Entrepreneur: Is It Rightfor You?

A key theme of this chapter is that the entrepreneurialprocess begins when enterprising individuals identifypotentially valuable opportunities. Clearly, this im-plies that not everyone is suited to becoming anentrepreneur. Just being able to spot potentiallyprofitable opportunities is not, in itself, enough. Inaddition, entrepreneurs must be willing, ready, andable to ‘‘run with the ball’’—to take the vigorous andcontinuing steps necessary to launch a new venture.Are you such a person? Are you capable not only ofdeveloping a vision of where you want to get, but alsoof getting there? If not, you should reconsider,because entrepreneurship definitely lives up toEdison’s suggestion that ‘‘Success is 2% inspirationand 98% perspiration.’’

Even though no single test of ‘‘entrepreneurialpotential’’47 is available, becoming a successful entre-preneur requires several key characteristics. Rateyourself on each of these dimensions—and then askseveral people who know you well to do the samething. The results may give you valuable insight intowhether you are cut out to be an entrepreneur.

1. Can you handle uncertainty? Is security (e.g., aregular paycheck) important to you, or are youwilling to live with uncertainty—economic andotherwise?

2. Are you energetic? Do you have the vigor andgood health required to work long hours for longperiods of time in order to reach goals that areimportant to you?

3. Do you believe in yourself and your abilities?Do you believe that you can accomplish whateveryou set out to accomplish, learning what youneed along the way?

4. Can you handle reversals and failures well?How do you react to negative outcomes—withdiscouragement, or with renewed commitment tosucceeding the next time around and learningfrom your mistakes?

5. Are you passionate about your goals and vision?Once you establish a goal or a vision of whereyou want to be, are you willing to sacrifice almosteverything else to get there, because you are trulypassionate about doing so?



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6. Are you good with other people? Can youpersuade them to see the world the way youdo? Can you get along with them well (e.g.,handle conflicts, build trust)?

7. Are you adaptable? Can you make ‘‘midcourse cor-rections’’ easily? For instance, can you admit thatyou made a mistake and reverse course to correct it?

8. Are you willing to take risks or leaps of faith?Once you establish a goal, are you willing totake reasonable risks to reach it? In other words,are you willing to do what you can to minimize therisks, but then, once you have done so, proceed?

Current evidence suggests that successful entrepre-neurs are high on all these dimensions—higher than

other people.48 They can handle uncertainty, areenergetic, believe in themselves, react well and flex-ibly to reversals, are passionate about their beliefs, aregood with other people, are highly adaptable, and arewilling to accept reasonable levels of risk. To theextent you possess these characteristics—or a leastmost of them—you may be well-suited for the role ofentrepreneur. We suspect that if you are reading thisbook, you fit this description, or you would not be inthis course! But if you find that you are relatively lowon several of these characteristics, you might want toreconsider; perhaps becoming an entrepreneur is notreally your particular ‘‘cup of tea.’’

Answering Questions AboutEntrepreneurship: Practice in ThinkingLike a Researcher

In this chapter, we discussed various methods foranswering questions about entrepreneurship in waysthat yield information that is both reliable andaccurate. Although we certainly don’t expect you tobecome an expert in using these methods (that takesyears of study and practice), we think it is importantfor you to understand how they work because if youdo, you will become an informed consumer ofknowledge about entrepreneurship. In other words,you’ll be able to tell what information is useful to you,and what is purely conjecture—or worse!

To gain practice in using these methods, try thefollowing exercise. Consider the following questionsand for each, describe how you might go aboutanswering it through use of (1) systematic observa-tion, (2) the case method, or (3) experimentation. For

each, try to specify clearly the variables you wouldstudy and the ways in which you would gatherinformation about these variables. Also try to for-mulate specific hypotheses about how your resultswill turn out. Finally, consider the implications forentrepreneurs if your findings confirm, or do notconfirm, you initial hypothesis.

1. Do companies that are first to market with a newproduct have a competitive edge over companiesthat enter the same market later?

2. Do repeat entrepreneurs (people who start onesuccessful company after another) search foropportunities differently from entrepreneurswho found only one company?

3. What factors lead individuals to give up secureand well-paid jobs to become entrepreneurs? Arethese factors the same for women and men?

case one

Entrepreneurship: A Field, an Activity, and a Way of Life

In 1996, Mario Morino launched the ‘‘Netpreneur’’

program, aimed at fostering high-tech, Internet-related

entrepreneurship in the greater Washington, D.C.,

region, and to provide a ‘‘learning community for

entrepreneurs and their stakeholders.’’

Morino was himself a successful entrepreneur, hav-

ing taken an initial $600 investment in Morino Associates,

founded in 1973 to develop software for mainframe

computers, all the way to an initial public offering. The

company then executed a merger to form Legent

Corporation, which was in turn acquired in 1995 by IT

giant Computer Associates for $1.7 billion, with Morino’s

share of the deal some $80 million.

The Washington, D.C., area is a major metropolitan

center and, as home to the federal government, globally

known. Those elements do not make it a hub of

entrepreneurism, however. When Morino launched his

program, D.C. lagged far behind the Silicon Valley region,



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Boston, and other urban centers as a locus for

entrepreneurial IT innovation.

Arguably, the region’s major businesses—govern-

ment, major nonprofits such as federally chartered mort-

gage lender Fannie Mae, traditional telecommunications

companies—aren’t the sort to draw the entrepreneurial-

minded. The one major dot-com in the region at the time,

America Online, employed far more administrative work-

ers than high-tech inventors (compared to Silicon Valley’s

Google, which scours the market for technology Ph.D.s,

needed to engineer its high-tech search services).

Even so, many nascent—and in some cases,

accomplished—entrepreneurs worked in the area, and

Morino’s program gave them a means to meet, learn, and

leverage each other’s resources. The program staged

regular ‘‘Coffee and Doughnets’’ mixers, with local and

national entrepreneurs as speakers, for face-to-face (or, in

Internet parlance, ‘‘f2f’’) interactions, and established a

Web site (http://www.netpreneur.org) and mailing lists.

Over the course of the program, the Netpreneur e-mail

newsletter grew from 35 subscribers to more than 12,000.

The Netpreneur program wasn’t the only, nor even

the first, effort in the area to promote entrepreneuring,

though it was the first to focus on the Internet, and to

broadly target ‘‘newbies’’ to the field. Organizations such

as the Mid-Atlantic Venture Association (MAVA), formed

a decade before Morino chartered Netpreneurs, were

working to introduce entrepreneurs to sources of capital,

and to strategic partners and relevant service providers.

According to its Web site, MAVA offers the following:

n Facilitates the flow of capital by creating opportu-

nities for membership interaction and investment.

n Hosts an annual venture fair, which showcases

premier companies for private equity investment

opportunities.

n Provides members with additional opportunities for

deal flow and interaction during numerous annual

luncheons, topical programming receptions, and

other events featuring speakers and/or business

discussions regarding entrepreneurial concerns,

investment trends, company financing, tax matters,

IPOs and public policy issues.

The Netpreneur program casts a far wider net, and

helped prospective entrepreneurs take the initial first

steps toward forums like MAVA.

Even though the D.C. area most clearly wasn’t

Silicon Valley, Netpreneur and other area venture-

oriented forums and groups did spawn, inspire, or

otherwise facilitate a number of successful entrepreneu-

rial ventures.

D.C. ‘‘netpreneur’’ Trevor Cornwell founded Skyjet in

1997 to serve as an aggregator for the highly fragmented

market for charter jets. Corporate jets are expensive to

own and operate, and sit idle a good deal of the time.

Cornwell’s innovation was to provide a means for jet

owners to advertise the availability of those jets to other

corporations and individuals needing the flexibility

afforded by an executive jet, but unwilling to bear the

full cost of one of their own. Here the contribution of the

Internet was to facilitate an inexpensive platform for

fielding inquiries and registering notices of availability.

Cornwell sold his company to publicly traded Canadian

aircraft manufacturer Bombardier in 2000.

Raj Khera became an entrepreneur after a career at

the National Institute of Standards and Technology, an

arm of the Department of Commerce, as an electrical

engineer and technology transfer specialist. Forming

Khera Communications with his brother, he turned his

knowledge of working with the government into the

development of GovCon.com, a business portal for

government contractors, which was ultimately sold to

VerticalNet, which specialized in portals for vertical

markets.

For every success, more than a few less-than-

successful efforts were made, from start-ups that never

quite gelled, to companies that successfully sought seed

capital and even institutional rounds of venture funding, but

went bankrupt. Susan DeFife, for example, created

WomenConnect.com as a site for women professionals,

launching it from the sunroom of her suburban home, and

growing to a staff of 25, while securing some $5.5 million

in venture funding. WomenConnect.com declared bank-

ruptcy in 2000, when the dot-com bubble’s burst took

down a great many start-ups. DeFife has moved on; she’s

now one of the team at the helm of Backfence, a new

service to create geographically local Web-based

communities.

At the end of 2002, Morino himself moved on,

redirecting the efforts of the Morino Institute toward

venture philanthropy and helping children of low-income

families in the D.C. region. He handed off the Netpreneur

program to a new team that pledged to keep it alive and

fostering entrepreneurial development. The Washington,

D.C., economy, meanwhile, is booming as a result of

increased government spending, especially in the

defense and intelligence communities, for homeland

security, and for the war on terror.



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Questions

1. The Morino Netpreneur program sought to create a

‘‘learning community for entrepreneurs and their

stakeholders.’’ It’s pretty clear who entrepreneurs

are, but who are their stakeholders?

2. What sort of entrepreneurial ventures would you

expect to come out of the ‘‘Netpreneurial’’ commu-

nity located in the Washington, D.C., area?

3. How might D.C.’s current booming economy affect

its entrepreneurial community?

Notes1 Shane, S., & Venkataraman, S. (2000). The promise of

entrepreneurship as a field of research. Academy ofManagement Review, 25, 217–226.

2 Sarason, Y., Dean, T., & Dillard, F. (2006). Entrepreneur-ship as the nexus of individual and opportunity: Astructuration view. Journal of Business Venturing, 21,286–305.

3 McMullen, J.S., & Shepherd, D.A. (2006). Entrepreneurialaction and the role of uncertainty in the theory of theentrepreneurs. Academy of Management Review, 31, 132–152.

4 Sarasvathy, S.D. (2004). The questions we ask and thequestion we care about: Reformulating some problems inentrepreneurship research. Journal of Business Venturing,2004, 19, 707–717.

5 Lumpkin, G.T. (In press). Intrapreneurship and innova-tion. In R. Baum, M. Frese, and F. Baron (Eds.), ThePsychology of Entrepreneurship. Mahwah, NJ: Erlbaum.

6 Ricchiuto, J. (1997). Collaborative Creativity. New York:Oakhill.

7 Koen, P.A., & Baron, R.A. (2003). Predictors of resourceattainment among corporate entrepreneurs: Executivechampion versus team commitment. Paper presented atthe Babson-Kaufman Entrepreneurship Research Con-ference, Babson Park, MA, June 2003.

8 Rauch, A., Wiklund, J., Frese, M., & Lumpkin, G.T.(2004). Entrepreneurial orientation and business perfor-mance: Cumulative empirical evidence. Paper presentedat 2004 Babson Kauffman Entrepreneurship ResearchConference, Wellesley, MA.

9 Dunn & Bradstreet (1999).10 O’Reilly, B. (1994). The new deal: What companies and

employees owe each other. Fortune, June 13, 44–47, 50, 52.11 Bedian, A.G., Ferris, G.R., & Kacmar, K.M. (1992). Age,

tenure, and job satisfaction: A tale of two perspectives.Journal of Vocational Behavior, 40, 33–48.

12 Greenberg, J., & Baron, R.A. (In press). Behavior inOrganizations, 9th ed. Upper Saddle River, NJ: Prentice-Hall.

13 See note 4.14 Bhide, A.V. (2000). The Origin and Evolution of New

Businesses. Oxford: University Press.

15 Baron, R.A., & Markman, G.D. (2005). Toward a processview of entrepreneurship: The changing impact ofindividual level variables across phases of new venturedevelopment. In M.A., Rahim, R.T., Golembiewski,R.T., & K.D. Mackenzie (Eds.), Current Topics inManagement, vol. 9. New Brunswick, NJ: TransactionPublishers, 45–64.

16 Ardichvilli, A., Cardozo, R., & Ray, S. (2003). A theory ofentrepreneurial opportunity identification and develop-ment. Journal of Business Venturing, 18, 105–124.

17 Hagenbaugh, B. (2004). Couple says celebrate second tripdown the aisle. USA Today, August 9, 7B.

18 Shane, S., Locke, E.A., & Collins, C.J. (2003). Entrepre-neurial motivation. Human Resource Management Review,13, 257–280.

19 Gartner, W.B. (1990). What are we talking about whenwe talk about entrepreneurship? Journal of BusinessVenturing, 5, 15–28; Verheul, I., Uhlaner, L., & Thurik,R. (2005). Business accomplishments, gender, andentrepreneurial self-image. Journal of Business Venturing,20, 483–518.

20 Stewart, W.H., Jr., & Roth, P.L. (2001). Risk takingpropensity differences between entrepreneurs man-agers: A meta-analytic review. Journal of Applied Psychol-ogy, 86, 145–153.

21 Miner, J.B., & Raju, N.S. (2004). When science divestsitself of its conservative stance: The case of riskpropensity differences between entrepreneurs and man-agers. Journal of Applied Psychology, 89, 3–13.

22 See note 15.23 Nicolaou, N., & Shane, S. (2006). Born entrepreneurs?

The genetic foundations of entrepreneurship. Unpub-lished manuscript under review, Tanaka BusinessSchool, Case Western Reserve University.

24 Ozgen, E., & Baron, R.A. (In press). Social sources ofinformation in opportunity recognition: Effects ofmentors, industry networks, and professional forums.Journal of Business Venturing.

25 Zhao, H., Seibert, S.E.., & Hills, G.E. (2005). Themediating role of self-efficacy in the development ofentrepreneurial intentions. Journal of Applied Psychology,90, 1265–1271.



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26 Markman, G.D., Balkin, D.B., & Baron, R.A. (2002).Inventors and new venture formation: The effects ofgeneral self-efficacy and regretful thinking. Entrepreneur-ship Theory & Practice, 20, 149–165.

27 White, R.E., Thornhill, S., & Hampson, E. (2005).Entrepreneurs and evolutionary biology: The relation-ship between testosterone and new venture creation.Paper currently under review.

28 See note 23.29 Baum, R., & Locke, E. (2004). The relationship of

entrepreneurial traits, skill, and motivation to newventure growth. Journal of Applied Psychology, 89, 587–598.

30 See note 23.31 Shane, S. (2004). Encouraging university entrepreneur-

ship? The effect of the Bayh-Dole Act on universitypatenting in the United States. Journal of BusinessVenturing, 19, 127–151.

32 Powers, J.P., & McDougall, P.P. (2005). University start-up formation and technology licensing with firms thatgo public: A resource-based view of academic entrepre-neurship. Journal of Business Venturing, 20, 291–311.

33 Phan, P., Siegel, D.S., & Wright, M. (2005). Science parksand incubators: Observations, synthesis, and futureresearch. Journal of Business Venturing, 20, 165–182.

34 Markman, G.D., Phan, P.H., Balkin, D.B., & Gianoidis,P.T. (2005). Entrepreneurship and university-basedtechnology transfer. Journal of Business Venturing, 10,241–263.

35 Mullins, J.W., & Forlani, D. (2005). Missing the boat orsinking the boat: A study of new venture decisionmaking. Journal of Business Venturing, 20, 47–69.

36 Mitchell, R.K., Buseniz, L., Lant, T., McDougall, P.P.,Morse, E.A., & Smith, J.B. (2004). The distinctive andinclusive domain of entrepreneurial cognition research.Entrepreneurship Theory and Practice, 28, Winter, 505–518.

37 Gaglio, C.M. (2004). The role of mental simulations andcounterfactual thinking in the opportunity identificationprocess. Entrepreneurship Theory and Practice, 28, Winter,533–552.

38 Baron, R.A., & Ensley, M.D. (Under review). Opportu-nity recognition as the detection of meaningful patterns:Evidence from the prototypes of novice and experiencedentrepreneurs.

39 Baron, R.A. (2006). Opportunity recognition as patternrecognition: How entrepreneurs ‘‘connect the dots’’ toidentify new business opportunities. Academy of Manage-ment Executive.

40 Evans, D., & Leighton, L. (1989). Some empirical aspectsof entrepreneurship. American Economic Review, 9, 519–535.

41 See note 1.42 Plous, S. (1993). The Psychology of Judgment and Decision

Making. New York: McGraw-Hill.43 See note 20.44 Schultze, W.S., Lubatkin, M.H., & Dino, R.N. (2003).

Toward a theory of agency and altruism in family firms.Journal of Business Venturing, 18, 473–490.

45 Krueger, N.F., Jr. (2003). The cognitive psychology ofentrepreneurship. In Z. Acs & D.B. Audretsch (Eds.),Handbook of Entrepreneurial Research. London: KluwerLaw International.

46 Lewin, K. (1951). Field Theory in Social Science. New York:Harper & Row.

47 Chen, C.C., Green, P.G., & Crick, A. (1998). Doesentrepreneurial self-efficacy distinguish entrepreneursfrom managers? Journal of Business Venturing, 13: 295–316.

48 Stewart, W.H., Jr., Watson, W.E., Carland, J.C., &Carland, J.W. (1999). A proclivity for entrepreneurship:A comparison of entrepreneurs, small business owners,and corporate managers. Journal of Business Venturing,14, 189–214.



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