McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.

Entrepreneurship and

Starting a

Small Business

CHAPTER 6

LEARNING OBJECTIVES

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1. Explain why people take the risks of entrepreneurship; list the attributes of successful entrepreneurs; and describe entrepreneurial teams, intrapreneurs, and home- and web-based businesses.

2. Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.

LEARNING OBJECTIVES

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3. Summarize the ways to learn about how small businesses operate.

4. Analyze what it takes to start and run a small business.

5. Outline the advantages and disadvantages small businesses have in entering global markets.

PRUDENCIO UNANUEGoya Foods

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• Goya Foods has provided for Hispanic families for over 75 years.

• Unanue, a Spanish immigrant, opened a small grocery store in 1936.

• Still family-owned, Goya now employs over 3,500 and sells more than 1,500 products.

NAME that COMPANY

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While I was an employee at a big company, I developed a product that has become a staple on most office supply lists. I needed something to mark the pages of a hymnal without falling out or damaging the book. What started as a simple, yellow piece of paper with a new adhesive evolved into many different versions – now there are Super Sticky, recycled, Pop-Up and electronic versions of my inventions.

Who am I, who did I work for, and what did I invent?

WHAT is ENTREPRENEURSHIP?

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• Entrepreneurship -- Accepting the risk of starting and running a business.

NOTABLE ENTREPRENEURS

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• French immigrant Élruthère Irènèe du Pont de Nemours started Du Pont in 1802.

• David McConnell borrowed $500 from a friend to start Avon.

• George Eastman started Kodak with a $3,000 investment in 1880.

• Jeff Bezos started Amazon.com with investments from his family and friends.

EARNING while LEARNING

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• Jeremy Young – Developed a prepaid laundry service for students at his university.

• Jessica Mah – Started InternshipIn that helps students find high-quality internships.

• Zach Workman – Launched Punch, an all-natural energy drink.

• John Goscha – Created her one-of-a-kind jewelery company, Tramonti, during her freshman year.

YOU’RE NEVER TOO YOUNG to be an ENTREPRENEUR

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Four reasons to start your business right away:

1. You don’t have a mortgage or kids to take care of.

2. You can survive on little funds and work long hours.

3. No disruption to your career path. It hasn’t started yet!

4. Use your alma mater for resources.

Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.

YOU’RE NEVER TOO OLD to be an ENTREPRENEUR EITHER!

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• The highest rate of entrepreneurship activity is in the 55-64 age group!

• Since 1996, older Americans have opened businesses at a higher rate than 20-34 year olds.

• Older entrepreneurs have greater experience and more financial resources.

Source: U.S. News and World Report, www.usnews.com, accessed October 2014.

WHY TAKE the RISK?

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LO 6-1

• Opportunity

• Profit

• Independence

• Challenge

Source: Forbes, www.forbes.com, accessed November 2014.

BIG TIME PROFIT

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• Michael Dell could buy 1,100 new laptops for every student at the University of Texas at Austin!

• Dietrich Mateschitz could buy himself a can of Red Bull every day for the next 11 million years!

• Liliane Bettencourt could buy a box of L’Oreal hair color for every woman in the world!

LO 6-1

Photo Credit: Emran Kassim

WHAT DOES IT TAKE to be an ENTREPRENEUR?

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LO 6-1

• Self-directed

• Self-nurturing

• Action-oriented

• Highly energetic

• Tolerant of uncertainty

Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.

FIVE STEPS to STARTING YOUR BUSINESS in SCHOOL

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LO 6-1

1. Find a problem or need.

2. Zero in on specifics.

3. Do research on campus, test products with students.

4. Move forward with your ideas. Don’t wait!

5. Sacrifice.

An IDEA is a GOOD OPPORTUNITY IF…

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LO 6-1

• It fills customers’ needs.

• You have the skills and resources to start a business.

• You can sell the product or service at a reasonable price and still profit.

• You can get your product or service to customers before the window of opportunity closes.

• You can keep the business going.

ENTREPRENEURIAL TEAMS

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LO 6-1

• Entrepreneurial team -- A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product.

• An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apple’s success.

MICROPRENEURS

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LO 6-1

• Micropreneurs -- Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle.

• About half of U.S. micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc.

• Nearly 60% of home-based micropreneurs are men.

• Computer technology has leveled the playing field.

• Corporate downsizing has led many to venture on their own.

HOME-BASED BUSINESS GROWTH

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LO 6-1

• Social attitudes have changed.

• New tax laws have loosened restrictions on deducting expenses for home offices.

HOME-BASED BUSINESS ISN’T EASY

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LO 6-1

• Getting new customers is difficult.

• Managing your time requires self-discipline.

• Work and family tasks are sometimes not separated.

• Government ordinances may restrict your business.

• Homeowner’s insurance may not cover business-related claims.

BENEFITS of HOME-BASED BUSINESSES

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LO 6-1

• Ability to start your business immediately

• Minimal start-up capital needed

• No rent or excessive set-up charges

• Comfortable working conditions

• Reduced wardrobe expenses

• No commuting

• Tax benefits

• Elimination of office politics

• Low risk for trial and error

DOWNSIDES of HOME-BASED BUSINESSES

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LO 6-1

• Difficult to establish work habits

• Limited support system

• Isolation

• Work space may be limited

• Clients may be uncomfortable coming to your home

• Zoning restrictions

• Success is based 100% on your efforts

Source: Entrepreneur, June 2010.

THINK YOU’RE READY to WORK from HOME?

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LO 6-1

ONLINE BUSINESS

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LO 6-1

• Online sales reached $262 billion in 2013, about 8% of all retail sales.

• All retail sales were up 2.5% in 2013. However, online retail sales grew 13%.

AFFILIATE MARKETING

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LO 6-1

• Affiliate Marketing -- An online marketing strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website.

Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.

BOOSTING YOUR BUSINESS’SONLINE PRESENCE

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Photo Credit: Marc Wathieu

LO 6-1

• Establish an identity.

• Be easy to find.

• Steal good ideas and make them your own.

• Look out for opportunities.

• Remember other forms of marketing.

• Be friendly!

• Art Fry of 3M developed Post-Its when he was trying to mark pages of his hymnal without damage.

INTRAPRENEURS

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LO 6-1

• Intrapreneur -- A creative person who works as an entrepreneur within a corporation.

• Intrapreneurs use a company’s existing resources to launch new products for the company.

GOVERNMENT and ENTREPRENEURSHIP

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LO 6-1

• Immigration Act passed in 1990 created a category of “investor visas” that encourage entrepreneurs to come to the U.S.

• Enterprise Zones -- Specific geographic areas to which governments attract private business investment by offering lower taxes and other government support.

• Incubators -- Offer new businesses low-cost offices with basic services.

TEST PREP

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• Why are people willing to take the risks of entrepreneurship?

• What are the advantages of entrepreneurial teams?

• How do micropreneurs differ from other entrepreneurs?

• What does the government do to promote entrepreneurship?

SMALL BUSINESSES

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LO 6-2

• Small Business -- Independently owned and operated, not dominant in its field of operation and meets certain standards of size.

• Businesses are “small” in relation to other businesses in their industries.

SMALL BUSINESS STATISTICS

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LO 6-2

• There are 28 million small businesses in the U.S.

• Of all nonfarm businesses in the U.S., almost 97% are considered small.

• Small businesses account for over 50% of the GDP.

• Small businesses have generated 65% of new jobs since 1995.

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

ADVANTAGES of SMALL OVER BIG BUSINESS

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Photo Credit: Elliot Brown

LO 6-2

• More personal customer service.

• The ability to respond quickly to opportunities.

BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE…

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• Owner closing a business to start another is reported as a “failure.”

• Changing forms of ownership is reported as a “failure.”

• Retirement is reported as a “failure.”

Source: World Features Syndicate.

• Tommy Hilfiger – First store went bankrupt

• Milton Hershey – First confectionery failed

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

THEY DID WHAT?Famous Business Failures

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LO 6-2

• Walt Disney – First film company went bankrupt

• Henry Ford – First two car companies failed

• L.L. Bean – Almost went bankrupt in first year

CAUSES of SMALL BUSINESS FAILURES

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LO 6-2

INCREASING SMALL BUSINESS SUCCESSES

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LO 6-2

LEARNING ABOUT SMALL BUSINESS

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LO 6-3

• Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs.

• Get Some Experience – Gain three years experience in the field; then start a part-time small business.

• Take Over a Successful Firm – Serve as an apprentice and eventually take over once the owner steps down.

SHOULD YOU STAY or SHOULD YOU GO?

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Suppose you worked in a company for two years and you see signs of it faltering. You and a coworker have ideas about how to succeed and are considering quitting to start your own company.

• Should you approach other coworkers about working for your new venture?

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

• What are the alternatives?

• What are the consequences?

• What is the most ethical choice?

MAJOR BUSINESS FUNCTIONS

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LO 6-4

• Planning

• Financing

• Knowing customers

• Managing employees

• Keeping records

BUSINESS PLANS

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LO 6-4

• Business Plan -- A detailed written statement that describes the nature of the business, the target market, the advantages the business will have over competition, and the resources and owners’ qualifications.

• A business plan forces potential owners to be specific about what they will offer.

• A business plan is mandatory for talking with bankers or investors.

• A good plan takes a long time to prepare.

• A good executive summary catches interest and tempts potential investors to read on.

WRITING a BUSINESS PLAN

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LO 6-4

• Getting the plan into the right hands is almost as important as getting the right information in it.

Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014.

A FAMILY AFFAIRWhat to Consider Before Starting a Family Business

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LO 6-4

• Clarify Expectations – What will each person contribute?

• Discuss Work/Family Boundaries – What is the line that separates work from personal relationships?

• Develop Good Communication – Agree about types of decisions you’ll make jointly and on your own.

• Clarify Long-Term Intentions – Discuss how long everyone will work full time and goals for the business.

• Have an Escape Hatch – Have a Plan B.

SOURCES of CAPITAL

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LO 6-4

• Personal savings

• Relatives

• Former employers

• Banks & finance companies

• Government agencies

• Angel investors

• Venture capitalists -- Individuals or companies that invest in new businesses in exchange for partial ownership.

FUNDING YOUR DREAMGetting Cash When Financing Isn’t an Option

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LO 6-4

1. Get close to your customers.

2. Make clients pay upfront.

3. Outsource tasks on the cheap.

4. Get in front of customers quickly.

5. Become an expert.

6. Ask for help.

7. Be patient.

Source: Inc., www.inc.com, October 2014.

COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS

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LO 6-4

• CDFIs are playing a big role in the economic recovery.

• First formed in the early 1980s; by 2009, over $1 billion flowed into CDFIs from investment companies.

• Only 1% of loans were not paid back in the last 30 years!

STATES TEST NEW CROWDINVESTING RULES

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• Sites like Kickstarter and Indiegogo have connected loan seekers to potential lenders.

• When the JOBS Act was passed in 2012, the goal was to make crowdfunding more accessible.

• It’s still too early to know how this will affect companies and investors.

The SMALL BUSINESS ADMINISTRATION

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LO 6-4

• Small Business Administration (SBA) -- A U.S. government agency that advises and assists small businesses by providing management training and financial advice.

• SBA started a microloan program in 1991 that provides very small loans to small business owners.

• Program judges worthiness based on the borrowers’ integrity and soundness of their business ideas.

The SMALL BUSINESS INVESTMENT COMPANY

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LO 6-4

• Small Business Investment Company (SBIC) -- A program through which private investment companies licensed by the SBA lend money to small businesses.

• A SBIC must have a minimum of $5 million in capital and can borrow up to $2 from the SBA for each $1 of capital it has.

• SBICs are able to identify a business’s trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.

SMALL BUSINESS DEVELOPMENT CENTERS

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LO 6-4

• Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states.

• SBDCs are able to evaluate the feasibility of your idea, develop your business plan and complete your funding application – for no charge.

HELP PLEASE!More SBA Resources and Other Helpful Groups

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LO 6-4

• Small Business Investment Companies

• The Office of Innovation & Entrepreneurship

• SCORE

• Entrepreneurship.org

KNOWING the MARKET

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LO 6-4

• Market -- Consumers with unsatisfied wants and needs who have both resources and willingness to buy.

• Set out to fill the market’s needs by offering top quality and great service at a fair price.

• One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.

BEYOND KNOWING WHAT YOUR CUSTOMERS NEED

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• Quirky allows customers to take part in designing products.

• Anyone in the community can take part in design, style, naming, packaging, and pricing.

• Products are sold through the site and can even be found in brick and mortar stores.

MANAGING EMPLOYEES

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LO 6-4

• Hiring, training and motivating employees is critical.

• Employees of small companies are often more satisfied with their jobs – they feel challenged and respected.

• Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.

ACCOUNTING ASSISTANCE

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LO 6-4

• Computers simplify the process by helping with inventory control, customer records and payroll.

• A good accountant can help in:

- Deciding whether to buy or lease equipment.

- Deciding whether to own or rent a building.

- Tax planning.

- Financial forecasting.

- Choosing sources of financing.

- Writing requests for funds.

LEGAL HELP

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LO 6-4

• Owners need outside consulting advice early in the process.

• Small and medium-sized firms cannot afford to hire experts as employees.

• A competent lawyer can help with:

- Leases

- Contracts

- Partnership agreements

- Protection against liabilities

MARKETING RESEARCH

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LO 6-4

• Marketing decisions need to be made long before introducing a product or opening a store.

• A marketing research study can help you:

- Determine where to locate.

- Whom to select as your target market.

- What is an effective strategy for reaching the market.

OTHER FORMS OF HELP

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LO 6-4

WHAT WENT WRONG?Five Mistakes Business Owners Make

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LO 6-4

1. They’re too afraid to take the leap!

2. They hire the wrong people.

3. They don’t want to give up control.

4. They become complacent.

5. They fail to see new opportunities.

Source: Alan Hughes, www.blackenterprise.com, accessed September 2014.

TEST PREP

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• A business plan is probably the most important document a small business owner will ever create. There are nine sections in the business plan outline. Can you describe at least five sections of a business plan?

SMALL BUSINESS PROSPECTS ABROAD

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LO 6-5

• Small- and medium-sized businesses accounted for 99% of recent export growth.

• Advantages of global trade for small businesses:

- Overseas buyers enjoy dealing with individuals.

- Small companies can usually begin shipping much faster.

- They provide a wide variety of suppliers.

- They can give more personal service and attention.

TEST PREP

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• Why do many small businesses avoid doing business globally?

• What are some of the advantages small businesses have over large businesses in selling in global markets?