Define the role of the entrepreneur in the United States and across the world.

The Foundations of
Entrepreneurship

Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.
-Niccolo Machiavelli
Entrepreneurs are the new rock stars.
-Cindy Boyd

Learning Objectives
On completion of this chapter, you will be able to:

1. Define the role of the entrepreneur in the United States and across the world.
2. Describe the entrepreneurial profile and evaluate your potential as an entrepreneur.
3. Describe the benefits and drawbacks of entrepreneurship.
4. Explain the forces that are driving the growth of entrepreneurship.

5. Explain the cultural diversity of entrepreneurship .
6. Describe the important role small businesses play in our nation’s economy. ‘
7. Put failure into proper perspective .
8. Explain how an entrepreneur can avoid becoming another failure statistic.

From Chapter 1 of Essentials of Entrepreneurship and Small Business Management, 6/e. Norman M. Scarborough. Copyright © 2011 by Pearson Education . Published by Prentice Hall. All rights reserved . 1

THE FOUNDATIONS OF ENTREPRENEURSHIP

LO 1
Define the role of the entrepreneur in the United States and across the world.

The World of the Entrepreneur
Welcome to the world of the entrepreneur! Around the world, growing numbers of people are realizing their dreams of owning and operating their own businesses. Entrepreneurship contin­ ues to thrive in nearly ever comer of the world. Globally, one in eleven adults is actively engaged
in launching a business. 1 Research by the Kauffman Foundation shows that in the United States
alone, entrepreneurs launch 550,000 businesses each month!2 This entrepreneurial spirit is the most significant economic development in recent business history. In the United States and around the globe, these heroes of the new economy are reshaping the business environment and creating a world in which their companies play an important role in the vitality of the global economy. With amazing vigor, their businesses have introduced innovative products and serv­ ices, pushed back technological frontiers, created new jobs, opened foreign markets, and, in the process, provided their foµnders _with tqe opportunity to do what they enjoy most.
Entrepreneurial activity is essential to a strong global economy. Many of the world’s largest companies continue to engage in massive downsizing campaigns, dramatically cutting the num­ ber of employees on their payrolls. This flurry of “pink slips” has spawned a new population of entrepreneurs: “castoffs” from large corporations (in which many of these individuals thought they would be lifetime ladder-climber s) with solid management experience and many productive years left before retirement. According to the Small Business Administration , during a recent one-year period, the largest companies in the United States shed 214,000 net jobs; during the
same period, small businesses with fewer than 20 employees created 1,625,000 net jobs! 3
One casualty of this downsizing has been the long-standing notion of job security in large corporations. As a result, members of Generation X (those born between 1965 and 1981) and Generation Y (those born between 1982 and 1995) no longer see launching a business as being a risky career path. Having watched large companies lay off their parents and grandparents after many years of service, these young people see entrepreneurship as the ideal way to create their own job security and success! They prefer to control their own destinies by building their own businesses.
The downsizing trend among large companies has created a more significant philosophical change. It has ushered in an age in which “small is beautiful.” Twenty-five years ago, competi­ tive conditions favored large companies with their hierarchies and layers of management; today, with the pace of change constantly accelerating, fleet-footed, agile, small companies have the competitive advantage. These nimble competitors can dart into and out of niche markets as they emerge and recede; they can move faster to exploit market opportunities; and they can use mod­ em technology to create within a matter of weeks or months products and services that once took years and all of the resources a giant corporation could muster. The balance has tipped in favor of small, entrepreneurial companies. Howard Stevenson, Harvard’s chaired professor of entrepreneurship, says, “Why is it so easy [for small companies] to compete against giant corporations? Because while they [the giants] are studying the consequences, [entrepreneurs] are changing the world.”4
One of the most comprehensive studies of global entrepreneurship conducted by the Global Entrepreneurship Monitor (GEM) shows significant variation in the rate of new business forma­ tion among the nations of the world when measured by total entrepreneurial activity, or TEA (see Figure 1). The study reports that 18.7 percent of the adult population in the United States­ nearly one in five people- is working to start a business. The GEM study also reports that globally men are twice as likely to start a business as women; that the majority of entrepreneurs tum to family members, friends, and other informal investors for external capital; and that
entrepreneurs are most likely to launch their companies between the ages of 25 and 44 .5 The
health of the global economy and the level of entrepreneurial activity are intertwined. “The world economy needs entrepreneurs,” says GEM researcher Kent Jones, “and increasingly, en­ trepreneurs depend on an open and expanding world economy for new opportunities and growth-through trade, foreign investment, and finance.”6
The United States and many other nations are benefiting from this surge in global entrepreneur­ ial activity. Eastern European countries, China, Vietnam, and many other nations whose economies were state-controlled and centrally planned are now fertil ground for growing small businesses. Even in Scotland, a country not traditionally recognized as a hotbed of entrepreneurial activity, entrepreneurs of all ages are hard at work.

50.0%
><
45.0%

•TEA Index
— Global TEA Average

FIGURE 1
Entrepreneurial Activity

<.!: 40.0%
w
t- 35.0’A0
:i: 30.0%
ti
< Across the Globe Source: Based on Niels Bosma, Kent Jones, Erkko Autio, and Jonathan Levie, Global Entrepreneurship Monitor 2007 Executive Report , – ‘ :::, gCII. .::. 25.0% 20.0% 15.0% Babson College, London School of Business, and Global Entrepreneurship Research Consortium, 2008, p.16. i!i 10.0% lq .o… 5.0% Country Fraser Doherty, a student at the University of Strathclyde in Glasgow, started making jams using a secret family recipe that had been handed down through the gen­ erations and then selling them at local shops, farmers markets, and online when he was just 14 years old. Four years later, Doherty’s company, Doherty’s Preserves, was producing-from his parents’ home-1,000 jars of jams and marmalades each week under the brand SuperJam. As sales grew beyond the capacity of the family kitchen, Doherty decided to move his business into a small factory in Herefordshire. SuperJam products now appear on the shelves of more than 600 super­ markets in the United Kingdom, and Doherty, just 19, recently won first place in the Global Student Entrepreneur Award competition. “[Going into business] is a huge learning opportunity and a lot of fun,” he says.7 Wherever they may choose to launch their companies, these business builders continue to embark on one of the most exhilarating-and one of the most frightening-adventures ever known: launching a business, It’s never easy, but it can be incredibly rewarding, both financially and emotionally, It can be both thrilling and dangerous, like living life without a safety net. Still, true entrepreneurs see owning a business as the real measure of success, Indeed, entrepreneur­ ship often provides the only avenue for success to those who otherwise might have been denied the opportunity, Who are these entrepreneurs, and what drives them to work so hard with no guarantee of success? What forces lead them to risk so much and to make so many sacrifices in an attempt to achieve an ideal? Why are they willing to give up the security of a steady paycheck working for someone else to become the last person to be paid in their own companies? This chapter will examine the entrepreneur, the driving force behind the American economy, ENTREPRENEURIAL PROFILE _ Fraser Doherty: Doherty’s Preserves What Is an Entrepreneur? LO 2 An entrepreneur is one who creates a new business in the face of risk and uncertainty for the Describe the entrepreneurial profile. purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them. Although many people come up with great business 3 THE FOUNDATIONS OF ENTREPRENEURSHIP Entrepreneur one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them . ideas, most of them never act on their ideas. Entrepreneurs do. In his 1911 book, The Theory of Economic Development , economist Joseph Schumpeter said that entrepreneurs are more than just business creators; they are change agents in society. The process of creative destruction, in which entrepreneurs create new ideas and new businesses that make existing ones obsolete, is a sign of a vibrant economy. Although this constant chum of businesses -some rising, others sinking, new ones succeeding, and many failing -concerns some people, in reality, it is an indication of a healthy, growing, economic system that is creating new and better ways of serving people’s needs and improving their quality of life and standard of living. Schumpeter compared the list of leading entrepreneurs to a popular hotel’s guest list: “always full of people, but people who are forever changing.”8 Researchers have invested a great deal of time and effort over the last few decades try­ ing to paint a clear picture of “the entrepreneurial personality.” Although these studies have identified several characteristics entrepreneurs tend to exhibit, none of them has isolated a set of traits required for success. We now tum to a brief summary of the entrepreneurial profile.9 1. Desire for responsibility. Entrepreneurs feel a deep sense of personal responsibility for the outcome of the ventures they start. They prefer to be in control of their resources, and they use those resources to achieve self-determined goals. 2. Preference for moderate risk. Entrepreneurs are not wild risk takers but are instead calculated risk takers. A study of the founders of the businesses listed as Inc. magazine’s fastest-growing companies found no correlation between risk tolerance and entrepreneur­ ship. “The belief that entrepreneurs are big risk takers just isn’t true,” says researcher and former Inc. 500 CEO Keith McFarland. 10 Unlike “high-rolling, riverboat” gamblers, entrepreneurs rarely gamble. Their goals may appear to be high-even impossible-in others’ eyes, but entrepreneurs see the situation from a different perspective and believe that their goals are realistic and attainable. They usually spot opportunities in areas that reflect their knowledge, backgrounds, and experiences, which increases their probability of success. One writer observes Entrepreneurship is not the same thing as throwing darts and hoping for the best. It is about planning and taking calculated risks based upon knowledge of the market, the available resources or products, and a predetermined measure of the potential for success.11 In other words, successful entrepreneurs are not as much risk takers as they are risk eliminators, removing as many obstacles to the successful launch of their ventures as possible. One of the most successful ways of eliminating risks is to build a solid business plan for a venture. 3. Confidence in their ability to succeed. Entrepreneurs typically have an abundance of confidence in their ability to succeed and are confident that they chose the correct career path. A recent American Express Open Ages Survey reports that 90 percent of Baby Boomer business owners and 76 percent of Generation Y business owners said that their decision to go into business was the right one.12 Entrepreneurs’ high levels of optimism may explain why some of the most successful entrepreneurs have failed in business-often more than once-before finally succeeding. 4. Desire for immediatefeedback. Entrepreneurs enjoy the challenge of running a business , and they like to know how they are doing and are constantly looking for feedback. “I love being an entrepreneur,” says Nick Gleason, co-founder of CitySoft Inc., a Web site design firm based in Cambridge, Massachusetts. “There’s something about the sheer creativity and challenge of it that I like.”13 5. High level of energy. Entrepreneurs are more energetic than the average person. That energy may be a critical factor given the incredible effort required to launch a start-up company. Long hours and hard work are the rule rather than the exception , and the pace can be grueling. According to the American Express Open study, 66 percent of Generation Y business owners and 58 percent of Baby Boomer owners work 10 or more hours a day and do so six days a week.14 6. Future orientation. Entrepreneurs have a well-defined sense of searching for opportuni­ ties. They look ahead and are less concerned with what they did yesterday than with what they might do tomorrow. Not satisfied to sit back and revel in their success, real entrepre­ neurs stay focused on the future. Tom Sternberg, founder of the Staples office supply chain, went on to start Zoots, a 54-store dry cleaning chain (he came up with the idea after a dry cleaners lost one of his Brooks Brothers dress shirts) and Olly Shoes, a small chain of children’s shoe stores (he came up with the idea after a frustrating experience shopping for shoes for his four boys). Entrepreneurs see potential where most people see only problems or nothing at all, a characteristic that often makes them the objects of ridicule (at least until their ideas become huge successes). Whereas traditional managers are concerned with managing available resources, entrepreneurs are more interested in spotting and capitalizing on opportunities. In the United States 62 percent of those engaged in entrepreneurial activity are opportunity entrepreneurs, those who start businesses because they spot an opportunity in the marketplace, compared to necessity entrepreneurs, those who start businesses because they cannot find work any other way. (Denmark leads the world with 81 percent opportunity entrepreneurs.) 15 Serial entrepreneurs, those who repeatedly start businesses and grow them to a sustainable size before striking out again, push this characteristic to the maximum . The majority of serial entrepreneurs are leapfroggers, people who start a company, manage its growth until they get bored, and then sell it to start another. A few are jugglers (or parallel entrepreneurs), people who start and manage several companies at once. The American Express Open study reports that 59 percent of Generation Y business owners and 33 percent of Baby Boomer owners are or plan to be serial entrepreneurs. Jen Groover is a classic serial entrepreneur. After launching a wellness and fitness center, Groover has gone on to build other businesses around her ability to generate ideas. She markets the Butler Bag, an attractive bag of her own design that doubles as a purse or as a carry-on bag and that provides com­ partments to keep contents organized . Groover also operates Jen Groover Productions, a company that creates ideas on a multitude of topics-from toys and tools to strategies and speeches . The Broomall, Pennsylvania-based company has several dozen proj- ects in various stages of development, and Groover also has signed a licensing agreement with a brand management company. She also is an author and manages to devote time to help young girls learn leadership skills through the Girls Take Charge program . Discussing her work, Groover says, “Every day, I feel like I am going to play. There’s so much happiness and reward that it outweighs any stress.” 16 It’s almost as if serial entrepreneurs are addicted to launching businesses. “Starting a company is a very imaginative, innovative, energy-driven, fun process,” says Dick Kouri, who has started 12 companies in his career and now teaches entrepre­ neurship at the University of North Carolina. “Serial entrepreneurs can’t wait to do it again.” 17 7. Skill at organizing. Building a company “from scratch” is much like piecing together a giant jigsaw puzzle. Entrepreneurs know how to put the right people together to accomplish ENTREPRENEURIAL PROFILE _ Tom Sternberg: Staples and Olly Shoes opportunity entrepreneurs entrepreneurs who start businesses because they spot an opportunity in the marketplace . necessity entrepreneurs entrepreneurs who start businesses because they cannot find work any other way. serial entrepreneurs entrepreneurs who repeatedly start businesses and grow them to a sustainable size before striking out again. ENTREPRENEURIAL PROFILE _ Jen Groover: Jen Groover Productions a task. Effectively combining people and jobs enables entrepreneurs to transform their visions into reality. 8. Value of achievement over money. One of the most common misconception s about entrepreneurs is that they are driven wholly by the desire to make money. To the contrary, achievement seems to be entrepreneur s’ primary motivating force; money is simply a way of “keeping score” of accomplishments-a symbol of achievement. What drives entrepreneurs goes much deeper than just the desire for wealth. Economist Joseph Schumpeter claimed that entrepreneurs have “the will to conquer, the impulse to fight , to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself.” Entrepreneurs experience “the joy of creating, of getting things done , or simply of exercising one’s energy and ingenuity .”18 Other characteristics frequently exhibited by entrepreneurs include: High degree of commitment. Entrepreneurship is hard work , and launching a company successfully requires total commitment from an entrepreneur. Business founders often immerse themselves completely in their companies. Most entrepreneurs have to overcome seemingly insurmountable barriers to launch a company and to keep it growing. That requires commitment. Tolerance for ambiguity. Entrepreneurs tend to have a high tolerance for ambiguous , ever-changing situations , the environment in which they most often operate. This ability to handle uncertainty is critical because these business builders constantly make deci­ sions using new, sometimes conflicting information gleaned from a variety of unfamiliar sources. Based on his research, entrepreneurial expert Amar Bhide says that entrepre­ neurs exhibit “a willingness to jump into things when it’s hard to even imagine what the possible set of outcomes will be.” 19 Flexibility. One hallmark of true entrepreneurs is their ability to adapt to the changing demands of their customers and their businesses. In this rapidly changing global economy, rigidity often leads to failure. As our society, its people , and their tastes change , entrepreneurs also must be willing to adapt their businesses to meet those changes. When their ideas fail to live up to their expectations , successful entrepre­ neurs change them! ENTREPRENEURIAL PROFILE _ Ed Cox: S.O.S. In 1917, Ed Cox invented a pre-soaped steel-wool scouring pad that was ideal for clean­ ing pots, and he used it as a “calling card” in his sales calls. Although his efforts at sell­ ing pots proved futile, Cox noticed how often his prospects asked for the soap pads. He quickly forgot about selling pots, shifted his focus to selling the scouring pads, which his wife had named S.O.S. (“Save Our Saucepans”), and went on to start a business that still thrives .20 Tenacity. Obstacles , obstructions, and defeat typically do not dissuade entrepreneurs from doggedly pursuing their visions. They simply keep trying. Noting the obstacles that entrepreneurs must overcome, economist Joseph Schumpeter argued that success is “a feat not of intellect but of will.” Milton Hershey ‘s first three candy-making businesses failed before he created the Lancaster Caramel Company, which became very successful and allowed him to build the chocolate manufacturing business that still carries his name and that remains one of the best known candy makers in the world.21 What conclusion can we draw from the volumes of research conducted on the entrepre­ neurial personality? Entrepreneurs a.re not of one mold; no one set of characteristics can predict who will become entrepreneurs and whether or not they will succeed. Indeed , diversity seems to be a central characteristic of entrepreneurs . One astute observer of the en­ trepreneurial personality explains, “Business owners are a culture unto themselves-strong , individualistic people who scorn convention -and nowadays , they ‘re driving the global economy.”22 Indeed, entrepreneurs tend to be nonconformists, a characteristic that seems to be central to their views of the world and to their success. As you can see from the examples in this chapter, anyone, regardless of age, race, gender, color, national origin, or any other characteristic, can become an entrepreneur (although not every­ one should). There are no limitations on this form of economic expression. Entrepreneurship is not a mystery; it is a practical discipline. Entrepreneurship is not a genetic trait; it is a skill that most people can learn. It has become a very common vocation. The editors of Inc. magazine claim, “Entrepreneurship is more mundane than it’s sometimes portrayed ….You don’t need to be a per­ son of mythical proportions to be very, very successful in building a company.”23 .The Benefits of Entrepreneurship LO 3-A – Surveys show that owners of small businesses believe they work harder, earn more money, Descri be the benefits of and are more satisfied than if they worked for someone else. Before launching any busi- entrepreneurshi p. ness venture, every potential entrepreneur should consider the benefits of small business ownership. Opportunity to Create Your Own Destiny Owning a business provides entrepreneurs the independence and the opportunity to achieve what is important to them. Entrepreneurs want to “call the shots” in their lives, and they use their businesses to make that desire a reality. The youngest of three children, Vivek Ranadive grew up in Mumbai, India, and dreamed of studying in the United States, at MIT. Raised to be competitive and to excel at whatever he did, Ranadive achieved his goal and enrolled at MIT. While there, he launched his first busi­ ness in which he scouted ads for companies looking to hire computer programmers and then contacted the companies to offer the programming services of MIT students whom he had recruited. After earning an MBA from Harvard, Ranadive started a computer consulting company and then launched Tibco Finance Technology, a company that provides a variety of business applications software, which he still manages. A successful author, Ranadive says that at a very early age, he decided that “I don’t want to work for somebody else. Instead, I want to be the master of my own destiny. “24 ENTREPRENEURIAL PROFILE _ Vivek Ranadive: Tibco Finance Technology Entrepreneurs: Creating Their Own Dream Jobs Although a ca reer i n corporate America can be rewa rdi ng, entre­ preneurs d iscover that owning thei r own compa nies, control l i ng thei r own destinies, and worki ng i n thei r dream jobs can be even more so. Consider the followi ng exam ples. An Ocean in the Desert Linda Nelson and her husba nd, George Sanders, a re world-class scuba divers who own a dive shop nea r G ra ntsville, Uta h, which is 4,250 feet above sea level and 900 m iles away from the nea rest ocean! The couple wa nted to find a way to offer classes at a trai ni ng facil ity that would com plement thei r dive shop, but rather tha n build a traditional pool, they bui lt thei r own “ocean” i n the desert. Looki ng at geothermal ma ps, Nelson realized that sa ltwater springs ra n beneath the grou nd that they had chosen as thei r location. Sa nders, who a lso owned a construction compa ny, had the equipment to excavate the site, and the couple set out to bui ld thei r desert ocea n. “Nobody thought we could do it,” la ug hs Nelson. The geo-thermally heated ma n-made ocea n, named Bon neville Seabase, is 200 ya rds across at its widest poi nt, contai ns bays as deep as 62 feet, and is home to saltwater species such as n u rse sharks, angel f ish, ta ngs, puffers, and others. Scuba divers and snorkelers come to Bon neville Seabase from across the U nited States, and Nelson a nd Sanders have hosted guests from as far away as Australia and Thai land. An n ual sales exceed $300,000. Dream Cars Fractional ownershi p, i n which a person buys the right to use a n asset for a certa i n n u m ber of days ea ch yea r, sta rted yea rs ago i n real estate before movi ng i nto private jets, yachts, and other luxury items. Blas Garcia Moros, a retired Microsoft executive, saw the opportunity to apply fractional ownership to one of his pas­ sions, exotic cars. Shortly after retiring, Moros was shopping for a new Ferrari but was so impressed with other makes of high per­ formance cars that he had difficulty deciding which one to buy. He soon realized that he was not the only exotic car buff who faced the same issue and, with his friend Larry Murrah, a former owner of several luxury car dealerships, he decided to launch Collexium, a company that offers upscale customers the chance to purchase fractional ownership in ten luxury and high perform­ ance sports cars, including two Ferraris, two Lamborghinis, a Lotus Elise, and two Bentleys. For an initiation fee of $15,000 and an annual subscription rate $15,000, Collexium members can drive any of the ten cars whenever they want up to 30 days a year. Currently, Moros operates only in South Florida but has plans to expand into other warm-weather cities with significant populations of wealthy residents. “Collexium offers auto enthusi­ asts what wine enthusiasts have: great variety and an easy way to enjoy it,” says Moros. Custom Motorcycles Jesse James, a distant relative of the famous outlaw from the 1880s, has become quite famous in his own right and also has a bit of a “bad boy” reputation. Unlike his bandit relative, however, the modern James is most famous for building custom motorcycles at his 250,000-square-foot shop in Long Beach, California. James, who starred in the hit television show Monster Garage, started West Coast Choppers in 1993 in a corner of his mother’s garage. ” I’m just a glorified welder,” says James, shrugging his wide shoul­ ders as if brushing off any attempt at imposing fame on him. “I build things.” He does build things. Today, James custom-builds motorcycles for clients from across the globe, including a recent $300,000 version of gleaming silver with a sidecar for Robert Wheeler, the CEO of Airstream, the company that makes the classic travel trail­ ers, to commemorate the company’s seventy-fifth anniversary. James’s company has hand-built custom motorcycles for well­ known clients such as Kid Rock, Shaquille O’Neal, and Keanu Reeves as well as for average citizens . Doing what he loves to do and doing it well have resulted in a three-year backlog of customer orders. James actually started on his career at age nine, when he took a Schwinn Straight Bar bicycle that his father had given him and decked it out with fresh chrome and pinstriping and sold it at a collector’s show for $850. “It’s not that different from what I do now,” James says, “except now I get 125 grand each. ” Indeed, each bike that West Coast Choppers builds is like a Savile Row suit, custom-fit to its owner and his or her personality, and prices typi­ cally range from $50,000 to $1 50,000. West Coast Choppers gen­ erates $5 million in annual sales. 1. Explain how these entrepreneurs exhibit the entrepreneuria l spirit. 2. What benefits do these entrepreneurs reap from owning their own businesses? What disadvantages do they face? 3. What career lessons can you learn from these entrepreneurs? Sources: Adapted from Jessica Chen, “Smart Ideas: Swell on Wheels,” Entrepreneur , October 2007, pp. 134-136; Dan Eldridge, “The Candywoman Can,” Paste , April 2008, p. 16; Sara Wilson, “More Than a Mirage ,” Entrepreneur, July 2007, p. 110; Jeff Garigliano, “Own a Lamborghini­ Part-Time,” FSB, February 2007, pp. 90-93; Arlyn Tobias Gajilan , “The Outlaw,” FSB, March 2003 , http://money.cnn.com /magazines/fsb/fsb_archive/ 2003/03/01/338769/index.html; Dirk Smillie, “Hooligan Chic,” Forbes , December 24, 2007 , pp. 87-92. social entrepreneurs people who start businesses that seek innovative solutions to some of soc iety’s most vexing problems. ENTREPRENEURIAL PROFILE _ Bob Shallenberger & John Cavanaugh: Highland Homes Like Vivek Ranadive, entrepreneurs reap the intrinsic rewards of knowing they are the driving forces behind their businesses. Opportunity to Make a Difference Increasingly, entrepreneurs are starting businesses because they see an opportunity to make a difference in a cause that is important to them. Known as social entrepreneurs, these business builders seek innovative solutions to some of society’s most vexing problems. Whether it is providing low-cost, sturdy housing for families in developing countries or establishing a recy­ cling program to preserve Earth’s limited resources, these entrepreneurs are finding ways to combine their concerns for social issues and their desire to earn a good living. Bob Shallenberger and John Cavanaugh, former fraternity brothers at St. Louis University, launched Highland Homes in St. Louis in 2003 with the idea of differenti­ ating their business from the competition by focusing on building environmentally friendly houses. Not only do their construction methods reduce the impact on the environment by using “green” techniques, but the houses they build also benefit from the increased efficiency with which they use energy, water, and other materials. “[Green building] is difficult, and it’s expensive to learn,” says Cavanaugh. “It’s chal­ lenging, but we see it as a big growth segment of the market. Being recognized as the top green residential builder in the country is the goal for us. ” 25 Opportunity to Reach Your Full Potential Too many people find their work boring, unchallenging, and unexciting. But not entrepreneurs! To them, there is little difference between work and play; the two are synonymous. Entrepreneurs’ businesses become their instruments for self-expression and self-actualization .They know that the only boundaries on their success are those imposed by their own creativity, enthusiasm, and vision . Owning a business gives them a sense of empowerment. Opportunity to Reap Impressive Profits Although money is not the primary force driving most entrepreneurs, the profits their busi­ nesses can earn are an important motivating factor in their decisions to launch companies . Most entrepreneurs never become super-rich, but many of them do become quite wealthy. In fact, nearly 75 percent of those on the Forbes list of the 400 richest Americans are first­ generation entrepreneurs!26 People who own their own businesses are more likely to be millionaires than those who are employed by others. According to Russ Alan Prince and Lewis Schiff , authors of The Middle Class Millionaire , more than 80 percent of middle class millionaires, those people with a net worth between $1 million and $10 million, own their own businesses or are part of professional partnerships. (They also work an average of 70 hours a week.) 27 Indeed, the typical millionaire’s business is not a glamorous, high-tech enterprise; more often, it is something much less glamorous-scrap metal, welding, auction­ eering, garbage collection , and the like. Friends since high school, Kelly Flatley and Brendan Synnott in 2003 launched Bear Naked, a Connecticut-based small company that sells all-natural granola products. Flatley and Synnott moved in with their parents and invested $3,500 each to rent space in a commercial kitchen. Using the recipe that Flatley had developed while in college to make a healthy granola mix, the pair handed out samples of their product at triathlons and called on managers at grocery stores in Connecticut to create “buzz” about their granola. Flatley and Synnott achieved a major breakthrough when they showed up at the headquarters of Stew Leonard’s, a local chain of gro­ cery stores, at 7 a .m. with their granola, milk, fruit, and yogurt and announced to C EO Stew Leonard, “We brought you breakfast! ” After spending two hours with the young entrepreneurs, Leonard agreed to put Bear Naked granola on his store shelves. Today, Bear Naked produces more than 40,000 pounds of granola each day, and its products are sold at Kroger, Costco, Safeway, Target, Whole Foods, and other retailers. Flatley and Synnott recently sold Bear Naked to industry giant Kellogg’s Kashi subsidiary for $122 million, making them both millionaires before they turned 30!28 Opportunity to Contribute to Society and Be Recognized for Your Efforts Often, small business owners are among the most respected and most trusted members of their communities. Business deals based on trust and mutual respect are the hallmark of many estab­ lished small companies. These owners enjoy the trust and recognition they receive from the customers and the communities they have served faithfully over the years. A Harris Interactive survey that measures the level of confidence people have in different institutions shows that small business topped the list and were the only institution to win the trust of a majority of Americans.29 Playing a vital role in their local business systems and knowing that their work has a significant impact on how smoothly our nation’s economy functions is yet another re­ ward for small business managers. One survey reports that 72 percent of business owners say that what they enjoy most about being a business owner is contributing to the local community.30 Opportunity to Do What You Enjoy and Have Fun at It A common sentiment among small business owners is that their work really isn’t work. Most successful entrepreneurs choose to enter their particular business fields because they have an interest in them and enjoy those lines of work. They have made their avocations (hobbies) their vocations (work) and are glad they did! These entrepreneurs are living Harvey McKay’s advice: “Find a job doing what you love, and you ’11 never have to work a day in your life.” The journey ENTREPRENEURIAL PROFILE _ Kelly Flatley & Brendan Synnott: Bear Naked rather than the destination is the entrepreneur’s greatest reward. “Starting a company is very hard to do,” says entrepreneur and small business researcher David Birch . “The risks are enormous; the anxiety is enormous. The only business you should start is one in which have a huge interest , or else you won’t have the persistence to stick with it. Get into [a business] because you’re fanati­ cally interested in it.”31 ENTREPRENEURIAL PROFILE _ John, Rodalyn, & Brian Knox: Sassy Engines LO 3-B Describe the drawbacks of entrepreneurship. John Knox was managing a farm equipment company in which he owned a part interest, but he and his son Brian really enjoyed competitive tractor pulling, a sport in which souped-up tractors compete to pull weighted sleds the greatest distance. Knox and his wife, Rodalyn, had a background in drag racing, and in 1981 John and Brian built a 1,200 horsepower engine for a Massey Ferguson tractor and named it the ” Sassy Massey.” Soon, John decided to sell his share of the farm equipment company and pursue his passion of building engines for tractor pulling competitions, monster truck exhibitions, and drag racing full time. Each engine takes about 40 hours to build, and the Knox’s family-owned business, Sassy Engines, builds about 15 engines a year for customers all across the globe, bringing in sales of $1 .3 million.32 Not only have the Knoxes found a way to make a living, but what is more important, they are doing something they love! The Potential Drawbacks of Entrepreneurship Although owning a business has many benefits and provides many opportunities, anyone planning to enter the world of entrepreneurship should be aware of its potential drawbacks. Individuals who prefer the security of a steady paycheck, a comprehensive benefit package, a two-week paid vacation, and the support of a corporate staff probably should not go into business for themselves. Some of the disadvantages of entrepreneurship include the following: Uncertainty of Income Opening and running a business provides no guarantee that an entrepreneur will earn enough money to survive. Some small businesses barely earn enough to provide the owner-manager with an adequate income. In the early days of a start-up, a business often cannot provide an attractive salary for its owner and meet all of its financial obligations, which means that the entrepreneur may have to live on savings. The steady income that comes with working for some­ one else is absent because the owner is .always-the last one to be paid. One California couple left their corporate jobs that together brought in $120 ,000 a year to start a small vineyard; their combined income in their first year of business: $30,000. Risk of Losing Your Entire Investment Business failure can lead to financial ruin for an entrepreneur, and the small business failure rate is relatively high. According to a study by the National Federation of Independent Businesses (NFIB), 35 percent of new businesses fail within two years, and 54 percent shut down within four years. Within six years, 64 percent of new businesses will have folded. Studies also show that when a company creates at least one job in its early years, the probability of failure after six years plummets to 35 percent!33 Before “reaching for the golden ring,” entrepreneurs should ask themselves if they can cope psychologically with the consequences of failure: • What is the worst that could happen if I open my business and it fails? • How likely is the worst to happen? (Am I truly prepared to launch my business?) • What can I do to lower the risk of my business failing? • If my business were to fail, what is my contingency plan for coping? Long Hours and Hard Work Business start-ups often demand long hours from their owners. The average small business owner works 52 hours a week, compared to the 41.1 hours per week the typical U.S. production employee works.34 In many start-ups, six- or seven-day workweeks with no paid vacations are the norm. In fact, a survey by American Express found that only 59 percent of small business owners were planning to take a summer vacation (and one-third of those planned to combine their vacations with a business trip). The primary reason entrepreneurs don’t take vacations? “Too busy.”35 The demands of owning a business make achieving work-life balance difficult for entrepreneurs. “You must have stamina to see it through,” says Chantelle Ludski, founder of London-based fresh!, an organic food company. “I put in many 16-hour workdays. Holidays and time off are things that go out the window!”36 Lower Quality of Life Until the Business Gets Established The long hours and hard work needed to launch a company can take their toll on the other aspects of an entrepreneur ‘s life. Business owners often find that their roles as husbands or wives and fathers or mothers take a back seat to their roles as company founders. In fact, according to a survey by American Express, 67 percent of entrepreneurs say that owning a business requires them to make sacrifices, most often in the areas of family relationships and friendships.37 Part of the problem is that half of all entrepreneurs launch their businesses between the ages of 25 and 39, just when they start their families (see Figure 2). As a result, marriages, families, and friendships are too often casualties of small business ownership. High Levels of Stress Starting and managing a business can be an incredibly rewarding experience, but it also can be a highly stressful one. Entrepreneurs often have made significant investments in their companies, have left behind the safety and security of a steady paycheck, and have mortgaged everything they own to get into business. Failure may mean total financial ruin , and that creates intense lev­ els of stress and anxiety! Sometimes entrepreneurs unnecessarily bear the burden of managing alone because they cannot bring themselves to delegate authority and responsibility to others in the company, even though their employees are capable. Complete Responsibility It’s great to be the boss, but many entrepreneurs find that they must make decisions on issues about which they are not really knowJedgeable. Many business owners have difficulty finding 35.0% 30.0% 25.0% 30.5% 29.6% • ‘ “” -s> … \ l ” I

FIGURE 2
Entrepreneur’s Age at Business Formation
Source: Based on Global Entrepreneurship Monitor, 2007.

<II
.g…’ 20.0% 18.1%
<..I.I
15.0%

10.0% 9.3% 9.0%

5.0% 3.5%

0%
18-24 25-34 35-44 45-54 55-64 Over 65
Age

advisors. A recent national small business poll conducted by the NFIB found that 34 percent of business owners have no one person to turn to for help when making a critical business deci­ sion.38 When there is no one to ask, the pressure can build quickly. The realization that the deci­ sions they make are the cause of their company’s success or failure has a devastating effect on some people.

Discouragement
Launching a business is a substantial undertaking that requires a great deal of dedication , discipline , and tenacity. Along the way to building a successful business , entrepreneurs will run headlong into many different obstacles, some of which appear to be insurmountable . In the face of such difficulties, discouragement and disillusionment are common emotions. Successful entrepreneurs know that every business encounters rough spots along the way, and they wade through difficult times with lots of hard work and an abundant reserve of optimism.
Despite the challenges that starting and running a business pose, entrepreneurs are very satisfied with their career choices . The Wells Fargo/Gallup Small Business Index reports that 84 percent of small business owners say that if they were choosing a career again , they would
still become small business owners.39 Most entrepreneurs are so happy with their work that they
want to continue it indefinitely. In fact, just 11 percent of entrepreneurs in a recent survey say that they intend to retire at all.40

LO 4
Explain the forces that are driving the growth of entrepreneurship.

Behind the Boom: What’s Feeding the Entrepreneurial Fire
What forces are driving this entrepreneurial trend in our economy? Which factors have led to this age of entrepreneurship? Some of the most significant ones include the following:

Entrepreneurs as heroes. An intangible but very important factor is the attitude that Americans have toward entrepreneurs. As a nation we have raised them to hero status and have held out their accomplishments as models to follow. Business founders such as Bill Gates (Microsoft Corporation) , Oprah Winfrey (Harpo Productions and Oxygen Media), Jeff Bezos (Amazon.com), Steve Jobs (Apple), and Phil Knight (Nike) are to entrepreneur­ ship what Tiger Woods and Kevin Garnett are to sports.
Entrepreneurial education. Colleges and universities have discovered that entrepre­ neurship is an extremely popular course of study. Disillusioned with corporate America’s downsized job offerings and less promising career paths, a rapidly growing
number of students sees owning a business as their best career option . Growing numbers of students enroll in college knowing that they want to start their own companies rather than considering entrepreneurship as a possibility later in life; indeed , many are starting companies while they are in college. Today more than 3,000 colleges and universities offer courses in entrepreneurship and small business, up from just 16 in 1970. More
than 200,000 students are enrolled in entrepreneurship courses, and many colleges and u niversities have difficulty meeting the demand for courses in entrepreneurship and small business.41
Demographic and economic factors. Nearly two-thirds of entrepreneurs start their businesses between the ages of 25 and 44, and the number of Americans in that age range currently is 85 million! Inaddition, the economic growth that spanned most of the last
25 years created a significant amount of wealth among people of this age group and many business opportunities on which they can capitalize.
Shift to a service economy. The service sector produces 80 percent of the jobs and 68 per­ cent of the Gross Domestic Product (GDP) in the United States, which represents a
sharp rise from just a decade ago.42 Because of their relatively low start-up costs, service
businesses have become very popular among entrepreneurs . The booming service sector continues to provide many business opportunities, from health care and computer mainte­ nance to pet waste removal and iPod repair.

While tinkering with his iPod, Ben Levy broke it and began searching online forums for
repair sources. He discovered that many other iPod owners faced the same problem and that Apple’s warranty did not cover the repairs and the repairs were very expensive. Sensing an opportunity, Levy and his friend Aaron Vronko bought several broken iPods and taught themselves to repair them . Before long, they hired other repair workers and launched a Web site, RapidRepair.com, with $1,500 from their personal savings. Today, the 15-employee company, which is based in Kalamazoo, Michigan, receives 500 iPods and other small electronic devices each week from all across the United States and 65
countries around the world and generates annual sales of more than $3 million.43

Technology advancements. With the help of modern business machines such as personal computers , laptop computers , fax machines , copiers , color printers, answering machines, and voice mail , even one person working at home can look like a big business. At one time, the high cost of such technological wizardry made it impossible for small businesses to compete with larger companies that could afford the hardware. Today, however, powerful computers and communication equipment are priced within the budgets of even the small­ est businesses . Although entrepreneurs may not be able to manufacture heavy equipment in their spare bedrooms , they can run a service- or information-based company from their homes-or almost anywhere-very effectively and look like any Fortune 500 company to customers and clients. Jimbo Wales, founder of Wikipedia, says, “Wherever my laptop is , that ‘s my office.”44
Independent lifestyle. Entrepreneursh ip fits the way Americans want to live-independent and self-sustaining. People want the freedom to choose where they live, the hours they work, and what they do. Although financial security remains an important goal for most entrepre­ neurs, many place top priority on lifestyle issues such as more time with family and friends, more leisure time, and more control over work-related stress.
E-Commerce and the World Wide Web. The proliferation of the World Wide Web, the vast network that links computers around the globe via the Internet and opens up oceans of information to its users, has spawned thousands of entrepreneurial ventures since its beginning in 1993. Online retail sales , which currently account for five percent of total retail sales, are forecast to continue to grow rapidly (see Figure 3), creating many op­ portunities for Web-savvy entrepreneurs . Travel services, computer hardware and soft­ ware, books , music , videos, and consumer electronics are among the best-selling items
on the Web, but entrepreneurs are learning that they can use this powerful tool to sell just about anything! In fact , entrepreneurs are using the Web to sell services, such as tours to the sites of their favorite television shows and movies (including Sex and the City and The Sopranos) and pajama parties for women , and products, such as crocheted cotton

$350.0 $334.7

ENTREPRENEURIAL
PROFILE _
Ben Levy & Aaron Vronko: RapidRepair.com

World Wide Web
the vast network that links comput­ ers around the globe via the Internet and opens up oceans of information to its users and is a major business opportunity for entrepreneurs.

FIGURE 3

$300.0
i$250.0
igii $200.0

$175..0

$-204.0
.

$235.4

$267.8

$301..0

U.S. Retail E-commerce Revenues
Source: Based on Forrester Research ,
2008.

i$150.0 ._ -.4…6 II<

c
$100.0

… I

$50.0 … I k
$0 •.•• •
2006 2007 2008 2009 2010 2011 201 2 –
Year

13

THE FOUNDATIONS OF ENTREPRENEURSHIP

ENTREPRENEURIAL
PROFILE _
Georgette Blau: On Location Tours

ENTREPRENEURIAL
PROFILE _
Maribel Lieberman: MarieBelle New York

14

thong underwear and recordings by musicians who perform for tips in the subway of New York City.45
Unfortunately , many small business owners have not yet tapped the power of the Web . According to a study by the National Small Business Association, 60 percent of small businesses have Web sites, nearly double the number that had Web sites in 1997. Among those small companies that have created Web sites, only 35 percent are actually engaged in e-commerce.46 Small companies that do conduct e-commerce typically reap benefits quickly, however , in the form of new customers and increased sales. These “net­ preneurs” are using the Web to connect with their existing customers and, ultimately, to attract new ones.

In 1999, Georgette Blau was living in New York City and working as an editor for a pub­ lishing house. On her way home, she often walked by the apartment building that was featured on the television show The Jefferson’s, from the 1970s and 80s. Blau came up with the idea of offering tours to sites around the city that had been featured in television shows and movies. Blau discovered that New York City is one of the most filmed cities in the world and has been the location for many hit television shows and movies. In addition, the city hosts 43.8 million tourists a year, each spending an average of $190 per day. Using $3,000 from her. savings, she launched a weekend business, the Scene on TV Tour, in which she served as owner and tour guide. In 2001, Blau quit her job as an editor and launched a tour based on the popular television show The Sopranos, a move that generated plenty of buzz and sales for her company. Blau’s company, now called On Location Tours, books most of its tours, including its popular Sex and the City Tour, through its Web site and generates annual sales of more than
$1 million. Now with 31 employees, Blau no longer conducts tours, choosing instead to manage her company’s growth, which she plans to fuel by launching similar tours in Washington, DC.47

International opportunities. No longer are small businesses limited to pursuing cus­ tomers within their own borders. The shift to a global economy has opened the door to tremendous business opportunities for entrepreneurs willing to reach across the globe. Although the United States is an attractive market for entrepreneurs , approximately
95 percent of the world’s population lives outside its borders. The emergence of potential markets across the globe and crumbling barriers to international business because of trade agreements have opened the world to entrepreneurs who are looking for new customers. Whereas companies once had to grow into global markets, today small businesses can have a global scope from their inception. Small companies comprise 97 percent of all businesses engaged in exporting, yet they account for only 29 percent of the nati6n’S” expcirf sales.48″Mosrsmall companies do not take advantage of export opportunities, often because their owners don’t know how or where to start an export initiative. Although terrorism and regional recessions remain challenges to
international trade , global opportunities for small businesses have a Jong-term positive outlook .
Although going global can be fraught with dangers and problems , many entrepreneurs are discovering that selling their products and services in foreign markets is really not so
difficult. Small companies that have expanded successfully into foreign markets tend to rely on the following strategies:
• Researching foreign markets thoroughly.
• Focusing on a single country initially.
• Utilizing government resources designed to help small companies establish an international presence.
• Forging alliances with local partners .

In 2001, Maribel Lieberman launched MarieBelle New York, a maker of high-quality, exquisitely decorated chocolates that come in a variety of exotic flavors such as cinnamon, Earl Grey, and cardamom. “[My chocolate] is modern in both design and

l

THE FOUNDATIONS OF ENTREPRENEURSHIP

flavor because I infuse MarieBelle chocolate with exotic ingredients like saffron and passion fruit,” she says. Even though the upscale chocolates are considered pricey for most chocolate lovers ($37 for a one-pound tin and $1 5 for a single chocolate bar), MarieBelle’s domestic sales have increased steadily as the company’s reputation has grown. Lieberman’s goal was to take her company into foreign markets as well. While staying at the ritzy George W hotel in Paris, Lieberman approached the food and beverage manager and the chef about selling her company’s products. One sip of her company’s hot chocolate convinced them to carry MarieB,elle’s chocolates. In addition to her company’s two New York City locations, Lieberman now has outlets in several countries. “I sell them at Bergdorf’s, the Four Seasons Hotel, Japan, France, and all over Europe,” says Lieberman, a former fashion designer and self­
taught chef.49

College: A Great Place to Launch a Business
For growing numbers of students, college is not just a time of learning, partying, and growing into young adulthood; it is fast be­ coming a place for building a business. More than 3,000 colleges and universities offer courses in entrepreneurship and small busi­ ness management to more than 200,000 students, and many of them have trouble keeping up with demand for these classes. “Students used to come to college and assume that five to ten years down the road, they’d start a business,” says Gerry Hills, co­ founder of the Collegiate Entrepreneurs Organization (CEO). “[Today], they come in preparing to get ideas and launch.”
Many of these collegiate entrepreneurs’ ideas come from their college experience itself. Russell D’Souza and Jon Groetzinger, students at Dartmouth College, watched fellow students discard perfectly good dorm furniture at the end of each academic year rather than move it or pay to store it over the summer. “We real­ ized there’s a great market for a furniture rental company that pro­ vides everything students need for their dorms,” says D’Souza. The two student entrepreneurs used their personal savings to launch their company, Evolving Vox, and to purchase modern dorm room essentials such as flat-screen televisions, DVD players, compact refrigerators, lamps, telephones, chairs, and futons. Students place orders through the Evolving Vox Web site and receive free delivery. D’Souza and Groetzinger were overwhelmed by the initial response to their business; Dartmouth students flocked to their Web site, and sales quickly exceeded $250,000. They have expanded Evolving Vox to Brandeis University and Cornell University and have plans to open offices on 10 other campuses soon.
During his freshman year at the University of Central Florida, David Lopez was participating in an internship program with a Fortune 500 business. After being marched into the company cafe­ teria with his co-workers, who were informed that their jobs were being eliminated on the spot, Lopez decided that a career in corpo­ rate America was not for him. “I wanted the American dream,” he says, “but I didn’t think I’d achieve it with a corporation .” Having worked for two fruit smoothie stores in high school, Lopez spotted the opportunity to open a smoothie kiosk on the campus of a

nearby community college. The initial barriers he faced were get­ ting permission from college officia ls to open the kiosk and finding the financing to get the business running. Lopez badgered the college’s cafeteria manager until he finally won approval to open a smoothie kiosk on campus. To get the capital he needed to set up the kiosk, Lopez maxed out his student loans (which he now admits may not have been legal) and used the $20,000 to buy equipment and cover start-up costs. Today, Lopez, who married his college sweetheart (who also was his business partner in the smoothie kiosk business), is the CEO of Froots Smoothie and has sold more than 100 franchises in the United States and abroad.

1. In addition to the normal obstacles of starting a business, what other barriers do collegiate entrepreneurs face?
2. What advantages do collegiate entrepreneurs have when launching a business?
3. What advice would you offer a fellow college student about to start a business?
4. Work with a team of your classmates to develop ideas about what your college or university could do to create a culture of entrepreneurship on your campus or in your community.

Sources: Adapted from Glenn Rifkin, “A Classroom Path to Entrepreneurship ,” New York Times, May 1, 2008, http://www.nytimes.com/ 2008/05/0I/business/smallbusiness/01 sbiz.html?_r= 1&pagewanted=print& oref=slogin; Jessica Chen, “Lair Necessities,” Entrepreneur, September 2007, p. 126; Julia Hecht, “Evolving Vox Makes Move-In Easier,” Dartmouth, September 21, 2006, http ://thedartmouth .com/2006/09/21/news/ evolving/print/; Diana Ransom , “Starting Up: University Incubators,” SmartMoney’s Small Biz, January 28, 2008, http://www.smsmallbiz.com/ capital/University_Incubators.html; Jenny Staletovich, “Froots Smoothie Stores Take Off ,” Miami Herald, December 3, 2007, www.miamiherald. com/business_monday /story/327485.html; Nichole L. Torres, “Big Biz on Campus,” Entrepreneur B.Y.O.B., December 2004, p. 130; Nichole L. Torres, “Hit the Floor,” Entrepreneur, May 2005, p. 122; Nichole L. Torres , “Inside Job,” Entrepreneur, March 2005, p . 132; Nichole L. Torres, “Class Acts,” Entrepreneur, June 2003, www.entrepreneur.com/article/print/ 0,2361,309005,00.html ; Ellen McCarthy, “A Dorm for Dreamers,” Washington Post, October 30, 2002, p. El ; “Hinman CEOs Living-Learning Entrepreneurship Program,” http://www.hinmanceos.umd. edu/.

15

THE FOUNDATIONS OF ENTREPRENEURSHIP

LO 5
Explain the cultural diversity of entrepreneurship.

Source: The Wall Street Journal, permi ssion Cartoon Features Syndicate.

16

The Cultural Diversity of Entrepreneurship
As we have seen, virtually anyone has the potential to become an entrepreneur. Indeed, diversity is a hallmark of entrepreneurship . We now explore the diverse mix of people who make up the 1ich fabric of entrepreneurship .

Young Entrepreneurs
Young people are setting the pace in starting businesses. Disenchanted with their prospects in corpo­ rate America and willing to take a chance at controlling their own destinies, scores of young people are choosing entrepreneurship as their primary career path. Teenagers and those in their 20s (the Millenial Generation or Generation Y) show high levels of interest in entrepreneurship . Many members of this diverse generation , 70 million strong, are deciding that owning their own companies is the best way to create job security and to achieve the work-life balance that they seek. According to the Global Entrepreneurship Monitor (GEM), people in the United States in the 18- to 24-year-old range are launching businesses at a faster rate than those in the 35- to 44-year old range.50 “People are realizing [that] they don’t have to go to work in suits and ties and don’t have to talk about budgets every day,” says Ben Kaufman, founder of Mophie, a company that he named after his Golden Retrievers , Molly and Sophie, and that makes iPod accessories such as cases, armbands , and belt clips. ”They can have a job they like. They can create a job for themselves .” Kaufman , who founded Mophie at age 18 while still in high school, eventually landed $2 million in venture capital for his company, which was gener­ ating annual sales of $5 million before he sold it to mStation. Kaufman is now working on Kluster, a
business based on a collaborative decision-making platform .51 Because of young people such as
Kaufman , the future of entrepreneurship looks very bright.

Women Entrepreneurs
Despite years of legislative effort, Women still face discrimination in the work force. However , small business has been a leader in offering women opportunities for economic expression through entrepreneurship. Increasing numbers of women are discovering that the best way to break the “glass ceiling” that prevents them from rising to the top of many organizations is to start their own companies . Women entrepreneurs have even broken through the comic strip barrier. Blondie Bumstead , long a typical suburban housewife married to Dagwood , now owns her own catering business with her best friend and neighbor , Tootsie Woodly!
Although more than 83 percent of women-owned businesses are concentrated in services and retailing (as are most small businesses), female entrepreneur s are branching out rapidly into other industries . According to the Center for Women’s Business Research , the fastest-growing industries for women-owned companies are wholesale , health care, arts and entertainment, and

THE FOUNDATIONS OF ENTREPRENEURSHIP

Have more time for family and
personal interests
17%

Other
10%

Desire to be my own boss 33%

FIGURE 4
Why Women Start Businesses
Source: Based on MasterCard Worldwide Survey, Fall 2006.

Increased flexibility in my schedule 19%

Opportunity to generate household income
21 %

professional, scientific, and technical services.52 Figure 4 shows the reasons women give for starting businesses.
Although the businesses women start tend to be smaller and require half as much start-up capital as those men start, their impact is anything but small. The nearly 10.5 million women­ owned companies in the United States employ more than 12.8 million workers and generate sales of $1.9 trillion a year! Women now own 41 percent of all privately-held businesses in the
United States.53 Although their businesses tend to grow more slowly than those owned by men,
women -owned businesses have a higher survival rate than U.S. small businesses overall.

The inspiration for Brenda Dronkers’s business came on a rainy day when she watched her three children gleefully bounce on two inflatable games at her church’s fall festival. “I looked at the kids bouncing, the drizzle outside, and my brain started ticking,” she recalls. Her idea was to create a permanent indoor playground filled with inflatable play spaces so that kids could have a place to play on rainy days or have a special place to celebrate their birthdays and other special events. In January 2000, Dronkers and a friend put up $25,000 in start-up capital, located inexpensive warehouse space in her hometown of Pleasanton, California, and filled it with inflatable games. In its first month, Pump It Up booked 90 kids’ parties; by the second month, the company was profitable and has been so ever since. Dronkers began franchising the company in 2002, and today, Pump It Up has 160 franchises in 38 states, generates annual sales of $55 million, and recently made Inc.
magazine’s list of the 500 fastest-growing small companies in the United States.54

Minority Enterprises
Another rapidly growing segment of the small business population is minority-owned businesses. Hispanics, Asians, and African-Americans, respectively, are the minority groups that are most likely to become entrepreneurs.55 Hispanics, who now make up the largest minority population in the
United States, own 6.6 percent of all businesses. African-Americans, who comprise about 13percent of the U.S . population, own 5 percent of all businesses , and Asians own 4.7 percent of all busi­ nesses.56 Minority-owned businesses have come a long way in the last two decades, however, and
their success rate is climbing.

A former college basketball star at Notre Dame, Lavetta Willis always has had a fierce com­ petitive streak. While in law school, Willis and two partners created a company called DaDa that sold hats and T-shirts aimed at the urban market. Inspired by her background in sports, Willis decided to launch a footwear business, LL International Shoe Company, with another partner under the DaDa brand. Her company’s product line now covers a wide range of athletic performance footwear and includes a shoe called Code M that contains an MP3 player and speakers! LL International Shoe’s annual sales have surpassed $15 million.57

ENTREPRENEURIAL
PROFILE _
Brenda Dronkers: Pump It Up

ENTREPRENEURIAL
PROFILE _
Lavetta Willis:
LL International Shoe /
Company /

A study by the Small Business Administration reports that minorities own 18 percent of all busi­ nesses, but their impact is significant.58 Minority-owned businesses generate $668.4 billion in annual revenues and employ more than 4.73 million workers with a payroll of more than $116.3 billion.59 The future is promising for this new generation of minority entrepreneurs , who are better educated, have more business experience, and are better prepared for business ownership than their predecessors.

Immigrant Entrepreneurs
The United States has always been a melting pot of diverse cultures, and many immigrants have been drawn to this nation by its promise of economic freedom. Unlike the unskilled “huddled masses” of the past, today’s immigrants arrive with more education and experience and often a desire to start a business of their own. In fact, immigrants are significantly more likely to start businesses than are native-born U.S. citizens. Although many of them come to the United States with few assets, their • dedication and desire to succeed enable them to achieve their entrepreneurial dreams.

ENTREPRENEURIAL
PROFILE _
Lana Fertelmeister: Lana Jewelry

Lana Fertelmeister’s parents emigrated from Russia to the United States with their six-year-old daughter, whom they taught that with hard work, anything is possible. She put that lesson to work in 2003 when she launched Lana Jewelry, a company that designs fine jewelry for everyday wear. Fertelmeister’s line of signature three-color gold and diamond jewe lry is available in more than 100 of the most exclusive retailers in the world, including Neiman Marcus, Saks Fifth Avenue, Borsheims, and Holt Renfrew, and the company is expanding into stores in Europe and Asia .
Lana Jewelry designs have received plenty of buzz from
celebrity clients such as Halle Berry, Sandra Bullock, Cameron Diaz, and Kate Hudson and from appearances in movies and television shows such as American Idol, Sex and the City, and Cashmere Mafia. Lana Jewelry’s annual sales recently hit $6 million.60

Part•Time Entrepreneurs
Starting a part-time business is a popular gateway to entrepreneurship. Part-time entrepreneurs have the best of both worlds: They can ease into business for themselves without sacrificing the security of a steady paycheck and benefits. The Internet (and particularly eBay) makes establishing and running a part-time business very easy; many part-time entrepreneurs run online businesses from a spare bedroom in their homes. For instance, Janice Ford-Freeman, who works full-time at the University of Alabama at Birmingham, enjoys shopping at garage sales and Goodwill outlets for vintage clothing , which she resells on her eBay store. Her part-time eBay business not only
brings in extra income but also gives her a sense of enjoyment. “[eBay] gives me a fabulous outlet to market the bargains I find,” Ford-Freeman says.61
According to the Panel Study of Entrepreneurial Dynamics , 50 percent of entrepreneurs work full-time and 20 percent have part-time work in addition to their businesses.62 A major advantage of going into business part-time is the lower risk in case the venture flops. Many part­
timers are “testing the entrepreneurial waters” to see whether their business ideas will work, whether there is sufficient demand for their products and services, and whether they enjoy being self-employed. As they grow, many part-time enterprises absorb more of entrepreneurs’ time until they become full-time businesses.

Home-Based Businesses
Home-based businesses are booming! More than 12 percent of the households in the United States operate home-based businesses , generating $427 billion a year in sales.63 Fifty-three percent of all small .businesses are home-based, but most of them are very small with no employ­
ees .64 Several factors make the home the first choice location for many entrepreneurs:
• Operating a business from home keeps start-up and operating costs to a minimum.
• Home-based companies allow owners to maintain a flexible lifestyle and work style. Many home-based entrepreneurs relish being part of the “open-collar workforce.”

THE FOUNDATIONS OF ENTREPRENEURSHIP

• Technology, which is transforming many ordinary homes into “electronic cottages,” allows
, entrepreneurs to run a wide variety of businesses from their homes.
• Many entrepreneurs use the Internet to operate e-commerce businesses from their homes , businesses that literally span the globe.

In the past, home-based businesses tended to be rather unexciting cottage industries such as making crafts or sewing. Today ‘s home-based businesses are more diverse; modern home-based entrepreneurs are more likely to be running high-tech or service companies with millions of dol­
lars in sales. The average home-based business generates revenues of $62,523 and earns a net income of $22,569.65

Family Businesses
A family-owned business is one that includes two or more members of a family with financial con­ trol of the company. Family businesses are an integral part of our economy. Of the 30.23 million businesses in the United States, 90 percent are family-owned and managed. These companies account for 62 percent of total U.S. employment and 78 percent of all new jobs, pay 65 percent of all wages, and generate 64 percent of the nation ‘s GDP. Not all of them are small; 37 percent of the
Fortune 500 companies are family businesses.66
“When it works right,” says one writer, “nothing succeeds like a family firm. The roots
run deep, embedded in family values. The flash of the fast buck is replaced with long-term plans . Tradition counts.”67 Indeed, in the typical family business, the family owns the com­ pany for an average of 78 years.68 Despite their magnitude, family businesses face a major
threat, a threat from within: management succession. Only 30 percent of family businesses survive to the second generation, just 12 percent make it to the third generation , and only 3 percent survive into the fourth generation and beyond. Business periodicals are full of stories describing bitter feuds among family members that have crippled or destroyed once thriving businesses .
To avoid such senseless destruction of valuable assets, founders of family businesses should develop plans for management succession long before retirement looms before them .

Kurt Schmidt, 49 , is the f ifth generation owner of A , E . Schmidt Company, a manufacturer of pool tables that was founded in 1850 in St. Louis, Missouri. Schmidt’s great-great-great-grandfather emigrated from Germany and started the business with just one lathe. In its nearly 160 years of operation, the f amily business has survived several catastrophes. ” We’ve had several brushes with oblivion over the years, but good relationships with vendors, a strong customer base, good employees, hard work , and some help from above have pulled us through,” he says. Schmidt has expanded the company’s product l i ne to include “virtually everything you could want for a game room ” and already is grooming the sixth generation to take over the family business . Schmidt’s son Michael has been working for the company part-time while he finishes college, and daughters Stephanie and Rachel are learning about the company by working in the factory and office after school. 69

Copreneurs
“Copreneurs” are entrepreneurial couples who work together as co-owners of their businesses. Unlike the traditional “Mom and Pop” (Pop as “boss” and Mom as “subordinate”), copreneurs “are creating a division of labor that is based on expertise as opposed to gender,” says one ex­ pert.70 Managing a small business with a spouse may appear to be a recipe for divorce, but most copreneurs say not. “There is nothing like sharing an intense, life-changing experience with someone to bring you closer,” says Caterina Fake, who with her husband, Sewart Butterfield, launched Flickr, a photo-sharing Web site. “Late nights, early mornings , laughter, terror, white­
knuckle meetings with people you desperately need to give you money, getting your first check from a paying user-how can you beat it?”71 Successful copreneurs learn to build the foundation

family-owned business
one that includes two or more mem­ bers of a family with financial con­ trol of the company.

ENTREPRENEURIAL
PROFILE _
Kurt Schmidt: A.E. Schmidt Company

copreneurs
entrepreneurial couples who work together as co-owners of their businesses.

19

for a successful working relationship before they ever launch their companies. Some of the char­ acteristics they rely on include:

• An assessment of whether their personalities will mesh-or conflict-in a business setting.
• Mutual respect for each other and one another ‘s talents.
• Compatible business and life goals-a common vision.
• A view that they are full and equal partners, not a superior and a subordinate.
• Complementary business skills that each acknowledges and appreciates and that lead to a unique business identity for each spouse.
• The ability to keep lines of communication open, talking and listening to each other.
• A clear division of roles and authority, ideally based on each partner’s skills and abilities, to minimize conflict and power struggles.
• The ability to encourage each other and to lift up a disillusioned partner.
• Separate work spaces that allow them to escape when the need arises.
• Boundaries between their business life and their personal life so that one doesn’t consume the other.
• A sense of humor.
• The realization that not every couple can work together.

Although copreneuring isn’t for everyone, it works extremely well for many couples and often leads to successful businesses. “Both spouses are working for a common purpose but also focusing on their unique talents,” says a family business counselor. “With all these skills put together, one plus one equals more than two.”72

ENTREPRENEURIAL
PROFILE _
Ben & Mena Trott: Six
Apa rt

Ben and Mena Trott started dating in high school and after marrying launched Six Apart, a company that makes popular Internet blogging tools, from a spare bedroom in their home. For four years, the copre­ neurs worked long days from desks that were just five feet apart. Today, Ben and Mena not only have separate offices, but they also have divided the responsibilities of running their company. Ben focuses on behind-the-scenes activities such as product de­ velopment, and Mena handles marketing and serves as Six Apart’s spokesperson. Under their combined
leadership, Six Apart continues to grow.73

Corporate Castoffs
Concentrating on shedding the excess bulk that took away their flexibility and speed , many large American corporations have been downsizing in an attempt to regain their competitive edge. For decades , one major corporation after another has announced layoffs-and not just among blue­
collar workers. According to placement firm Challenger, Gray, and Christmas, corporations lay off an average of 75,000 employees per month.74 Executives and production workers alike have experienced job cuts. Millions of people have lost their jobs, and these corporate castoffs have
become an important source of entrepreneurial activity. Some 20 percent of these discharged corporate managers have become entrepreneurs, and many of those left behind in corporate America would like to join them.
Many corporate castoffs are deciding that the best defense against future job insecurity is an entrepreneurial offense. Accustomed to the support in the corporations they left, many corporate castoffs decide to purchase franchises, where there is a built-in manage­ ment system already in place. Entrepreneur magazine surveyed the companies on its Franchise 500 list recently and discovered that 77 percent of franchisors report that “second­ career executives” (i.e., corporate castoffs) were among the primary purchasers of their
franchises .75

THE FOUNDATIONS OF ENTREPRENEURSHIP

Corporate Dropouts
The dramatic downsizing of corporate America has created another effect among the employees left after restructuring : a trust gap. The result of this trust gap is a growing number of dropouts from the corporate structure who then become entrepreneurs. Although their workdays may grow longer and their incomes may shrink, those who strike out on their own often find their work more rewarding and more satisfying because they are doing what they enjoy. Other entre­ preneurs are inspired to launch their companies after being treated unfairly by large impersonal corporate entities.

In the 1950s, Marion Kauffman was so successful as a salesman for a pharmaceutical company that his pay exceeded that of the company president, who promptly cut Kauffman’s sales territory. Kauffman managed to rebuild sales so that he once again earned more than the boss, who then cut Kauffman’s commission rate. Outraged, Kauffman left to start his own business, Marion Laboratories, which he sold to Dow Chemical Company in 1989 for $ 5.2 billion! Before his death in 1993, Kauffman estab­ lished the Ewing Marion Kauffman Foundation in Kansas City, Missouri to promote
entrepreneurship. 76

Becau se they have college degrees , a working knowledge of business , and years of management experience, both corporate dropouts and castoff s may ultimately increase the small business survival rate. A survey by Richard O’Sullivan found that 64 percent of people starting businesses have at least some college education, and 14 percent have advanced degrees.77 Better-trained , more experienced entrepreneurs are more likely to succeed.

Social Entrepreneurs
Social entrepreneurs use their skills not only to create profitable business ventures but also to achieve social and environmental goals for society as a whole. Their businesses often have a triple bottom line that encompasses economic , social , and environmental objectives. These en­ trepreneurs see their businesses as mechanisms for achieving social goals that are important to them as individuals.

Ron Gonen, a former consultant, saw a way to create a business that could both address the vexing problem of garbage disposal and the limited landfill space in which to put it and also generate a profit. Gonen’s company, RecycleBank, provides homeowners with recycling carts that are equipped with radio frequency identifica­ tion (RFID) tags . When a truck picks up a cart, it weighs the recycled material and an RFID scanner records the information, which is sent to RecycleBank. Each household earns points based on how much material it recycles, and residents can redeem their RecycleBank points at retailers such as Starbucks, Patagonia, Stonyfield Farm, Dunkin’ Donuts, and others . So far, RecycleBank says that it has more than doubled the recycling rates in the communities with which it has partnered, saving more than 277,000 trees and 15 million gallons of oil and diverted more than 19,500 tons of waste from landfills. Its customers have redeemed more than 3 million reward points. RecycleBank, which generates its income by taki ng a percentage of the money that cities save by producing less landfill space, recently received $30 million in venture capital to expand its presence in the United States and to market its
service in Europe.78

Retiring Baby Boomers
Because people are living longer and are remaining active as they grow older, the ranks of older entrepreneurs are growing. In fact , according to studies by the Ewing Marion Kauffman Foundation , the level of entrepreneurial activity among people ages 55 to 64 actually exceeds that of people ages 20 to 34 . One advantage that older entrepreneurs have is wisdom that has been forged by experience.

ENTREPRENEURIAL
PROFILE _
Marion Kauffman: Marion Laboratories

social entrepreneurs entrepreneurs who use their skills not only to create profitable businesses but also to achieve social and environ­ mental goals for the common good.

ENTREPRENEURIAL
PROFILE _
Ron Gonen: RecycleBank

21

ENTREPRENEURIAL
PROFILE _
Lisa Gable: L.G. Accessories

At age 70, Lisa Gable, who had been frustrated by drooping bra straps all of her life, designed a clever solu­ tion to the problem and launched a company to market the Strap-Mate. Today, at age 84, Gable is still running her company, L.G. Accessories, from her home in East Windsor, New Jersey. Gable applied for and received a patent for her invention, and because no one would finance a 70-year-old entrepreneur, she launched her company using credit cards. In addition to selling the Strap-Mate on the L.G. Accessories Web site, Gable also has managed to get her product into major retailers such as Nordstrom and J.C. Penney.79

., HANDS ON…
HOW TO

Launch a Successful Business While You Are Still in College
Collegiate entrepreneurs are becoming increasingly common as colleges and universities offer more courses and a greater variety of courses in the areas of entrepreneurship and small business man­ agement. Launching a business while in college offers many advan­ tages, including access to research and valuable advice, but starting an entrepreneurial career also poses challenges, including a lack of financial resources, business experience, and time. What are some of the most common myths that prevent young people (not just college students) from launching businesses?
• Idon’t have enough money to launch a business. One of the greatest benefits of the shift in the United States to a service economy is that service businesses usually are very inexpen­ sive to start. One young entrepreneur worked with a friend to launch a Web development company while in high school, and their total start-up cost was just $80.
• Idon’t have enough time. Many companies that have grown into very successful, mature businesses were started by entre­ preneurs in their spare time. Everyone has the same 24 hours in a day. What matters is what you do with those hours.
• I’m not smart enough to start a company SAT scores and grades have little correlation to one’s ability to launch a successful busi­ ness. Quite a few successful entrepreneurs, including Michael Dell (Dell Inc.), Richard Branson (Virgin), Walt Disney (Disney), Mark Zuckerberg (FaceBook) and Debbi Fields (Mrs. Fields Cookies), dropped out of college to start their businesses .
• I’m not creative enough to come up with a good idea for a business. Everyone has the potential to be creative. Some of the most successful businesses are the result of an entrepreneur
who recognized a simple need that people had and created a business to meet that need.
• Idon’t have any experience. Neither did Bill Gates (Microsoft) and Michael Dell (Dell Inc.) when they launched their companies, and things worked out pretty well for both of them. Business experience can be an important factor in a company’s success, but every entrepreneur has to start somewhere to gain that experience.
• Imight fail. Failure is a possibility. In fact, the survival rate of new companies after four years is 44 percent. Ask yourself:

What is the worst that can happen if I launch a business and it fails? Entrepreneurs do not allow the fear of failure to stop them from trying to realize their dreams.

If you want to become a successful collegiate entrepreneur, what can you do to increase the chances of your success? The following tips will help:

Recognize that starting a business at an early age may be to your advantage
Young people tend to be highly creative, and that can provide your company with a competitive advantage. In addition, young people often accompl ish things simply because they don’t know that they are not supposed to be able to do them!

Build a business plan
One of the best ways to lower the probability that your business will fail is to create a business plan. Doing so forces you to ask and then answer some tough questions about your idea and your proposed venture.

Use all of the resources that are available to you Many colleges and universities now offer courses in entrepreneur­ ship and small business management and have faculty members who are experts in the field. In many cases, the people who are teaching these classes are veteran entrepreneurs themselves with tremendous reservoirs of knowledge and experience. Some col­ leges provide special dorms for budding entrepreneurs that serve as business incubators. Smart collegiate entrepreneurs tap into the pool of resources that their campuses offer.

Find a mentor
Most young entrepreneurs have not had the opportunity to gain a wealth of business experience, but they do have access to mentors who do. Mike Brown, who recently won the top prize at the annual Global Student Entrepreneur Awards for his company ModBargains.com, a business that sells aftermarket products for modifying cars and trucks, says that his first boss, who owns several businesses, served as his mentor. ModBargains.com, which Brown started with fellow car enthusiast Ron Hay, now has more than 4,000 products available and has surpassed annual sales of $1 million.

THE FOUNDATIONS OF ENTREPRENEURSHIP

The Power of “Small” Business
Of the 30.23 million businesses in the United States, approximately 30.14 million, or 99.7 percent, are considered “small.”Although there is no universal definition of a small business (the U.S. Small Business Administration has more than 800 definitions of a small business based on industry cate­ gories), a common delineation of a small business is one that employs fewer than 100 people. They thrive in virtually every industry, although the majority of small companies are concentrated in the service and retail industries (see Figure 5). Although they may be small businesses, their contributions to the economy are anything but small. For example, small companies employ 51 percent of the nation’s private sector workforce, even though they possess less than one-fourth of total business as­ sets. Almost 90 percent of small businesses employ fewer than 20 workers, but small companies pay more than 45 percent of total private payroll in the United States. Because they are primarily labor in­
tensive, small businesses actually create more jobs than do big businesses. In fact, over the last decade small companies have created 60 percent to 80 percent of the net new jobs in the U.S. economy.80
Researcher David Birch says that the ability to create jobs is not distributed evenly across the small business sector, however. His research shows that just 3 percent of small companies create 70 percent of the net new jobs in the economy, and they do so across – au . industry sectors, not just in “hot” industries. Birch calls these job-creating small companies “gazelles,” those growing at 20 percent or more per year for four years with at least

Service
51.3%

Retail 10.3%

small business
one that employs fewer than 100 people.

gazelles
small companies that are growing at 20 percent or more per year with at least $100,000 in annual sales; they create 70 percent of net new jobs in the economy.

FIGURE 5
Small Businesses by Industry
Source: U.S. Small Business Administration, 2007.

$100,000 in annual sales. His research also identified “mice,” small companies that never grow much and don’t create man y jobs. The majority of small companies are “mice.” Birch tabbed the country’s largest businesses “elephants,” which have continued to shed jobs for several years.81
Small businesses also produce 51 percent of the country ‘s private GDP and account for 47 percent of business sales.82 In fact, the U.S. small business sector is the world’s second­ largest “economy,” trailing only the entire U.S. economy! Small companies also are incubators of new ideas, products, and services. Small firms actually create 13 times more patents per employee than large companies.83 Traditionally, small businesses have played a vital role in innovation, and they continue to do so today. Many important inventions trace their roots to an entrepreneur, including the zipper, FM radio, the laser, the brassiere, air conditioning , the escala­ tor, the light.bulb, the personal computer, and the automatic transmission.

LO 6
Put failure into the proper perspective.

Putting Failure into Perspective
Because of their limited resources, inexperienced management, and lack of financial stability, small businesses suffer relatively high mortality rates. A recent study reports that after two years, 34 percent of new companies have failed and that after four years 56 percent have failed .84 Figure 6 shows the number of business births and business terminations in recent years, clear evidence of the constant “chum” that exists as entrepreneurs create new businesses as others close.
Because they are building businesses in an environment filled with uncertainty and shaped by rapid change, entrepreneurs recognize that failure is likely to be part of their lives , but they are not paralyzed by that fear. “The excitement of building a new business from scratch is greater than the fear of failure,” says one entrepreneur who failed in business several times before finally succeeding.85 Entrepreneurs use their failures as a rallying point and as a means of refocusing their business ventures for success. They see failure for what it really is: an opportunity to learn what does not work! Successful entrepreneurs have the attitude that failures are simply stepping stones along the path to success. Basketball legend Michael Jordan displayed the same attitude. “I’ve missed more than 9,000 shots in my career,” he says. “I lost almost 300 games. Twenty-six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”86
Failure is a natural part of the creative process. The only people who never fail are those who never do anything or never attempt anything new. Baseball fans know that babe Ruth held the record for career home runs (714) for many years, but how many know that he also held the record for strikeouts (1,330)? Successful entrepreneurs know that hitting an entre­ preneurial home run requires a few strikeouts along the way, and they are willing to accept them. Failure is an inevitable part of being an entrepreneur, and true entrepreneurs don’t quit

FIGURE 6 700,000
Number of Business 600,000
Starts and Closures of VI
:!:!

Employer Firms

::::,
VI 500,000

Source: Small Business v
Administration, 2007 . c 400,000
ti
.;.;.;.

“‘
….,.
..c
E
::::,

300,000

200,000

100,000

0

\

THE FOUNDATIONS OF ENTREPRENEURSHIP

when they fail. One entrepreneur whose business burned through $800 million of investors’ money before folding says , “If you’re an entrepreneur, you don ‘t give up when times get
tough.”87
One hallmark of successful entrepreneurs is the ability to fail intelligently , learning why they failed so that they can avoid making the same mistake again. James Dyson, whose com­ pany makes one of the best selling vacuum cleaners in the world, made 5,127 prototypes of his bagless vacuum cleaner before he hit upon one that worked. “There were 5,126 failures,” he says, “but I learned from each one. That’s how I came up with a solution. So I don’t mind fail­ ure .”88 Like Dyson, entrepreneurs know that business success does not depend on their ability to avoid making mistakes but to be open to the lessons each mistake teaches . They learn from their failures and use them as fuel to push themselves closer to their ultimate target. Entrepreneurs are less worried about what they might lose if they try something and fail than about what they might lose if they fail to try.
Entrepreneurial success requires both persistence and resilience, the ability to bounce back from failure. Thomas Edison discovered about 1,800 ways not to build a light bulb before hit­ ting on a design that worked. Walt Disney was fired from a newspaper job because, according to his boss, he “lacked imagination and had no good ideas.” Disney also went bankrupt several times before he created Disneyland. R. H. Macy failed in business seven times before his retail store in New York City became a success. In the spirit of true entrepreneurship, these visionary business leaders refused to give up in the face of failure; they simply kept trying until they achieved success. When it comes to failure, entrepreneurs’ motto seems to be: Failure is tempo­ rary; quitting is permanent.

Michelle Long launched World2Market, an online company that linked entrepreneurs in developing countries with buyers in the United States, and raised several million dollars from private investors and venture capital companies . World2Market folded in 2001, but Long learned many valuable lessons from the failed business and decided to give entrepreneurship another try in 2002, when she launched Sustainable Connections, a social network that is designed to help small businesses that use sustainable business practices to grow. Long is making sure she does not make the same mistakes with her current venture that she made with World2Market. Her plan is working, and many of
the investors who lost money in Long’s first venture decided to back Sustainable Connections. 89

How to Avoid the Pitfalls
Although failure can be a valuable pa.it of the entrepreneurial process , no one sets out to fail in business . Now we must examine the ways to avoid becoming another failure statistic and gain insight into what makes a successful business.

Know Your Business in Depth
We have already emphasized the need for the right type of experience in the business you plan to start. Get the best education in your business area you possibly can before you set out on your own. Become a serious student of your industry . Read everything you can ­ trade journals, business periodicals, books, research reports-relating to your indus­ try and learn what it takes to succeed in it. Personal contact with suppliers, customers , trade associations, and others in the same industry is another excellent way to get that knowledge. Smart entrepreneurs join industry trade associations and attend trade shows to pick up valuable information and to make key contacts before they open their doors for business.

Laura Bennett worked in the insurance industry for years as an actuary and an executive before she launched her own company targeting an interesting niche in the same industry-pet insurance . Bennett also tapped the expertise of a former co-worker, Bill Acton, to help her launch Embrace Pet Insurance. Acton was so impressed with Bennett’s business plan that he invested $ 50,000 in the start-up.

ENTREPRENEURIAL
PROFILE _
Michelle Long: Sustainable Connections

ENTREPRENEURIAL
PROFILE _
Laura Bennett: Embrace Pet Insurance

THE FOUNDATIONS OF ENTREPRENEURSHIP

Bennett is the only pet insurance actuary in the United States, and because her company specializes in insurance policies for pets, she can offer customized packages for her clients and their pets. Embrace wrote its first policy in 2006 but already has passed the $2 million mark in policies written. Bennett ‘s success shows that successfu l entrepreneurs are like sponges, soaking up as much knowledge as they can from a variety of sources.go

Develop a Solid Business Plan
For any entrepreneur, a well-written business plan is a crucial ingredient in preparing for business success. Without a sound business plan, a firm merely drifts along without any real direction . Yet entrepreneurs, who tend to be people of action, too often jump right into a business venture without taking time to prepare a written plan outlining the essence of the business. Not only does a plan provide a pathway to success, but it also creates a benchmark against which an entrepreneur can measure actual company performance. Building a successful business begins with implementing a sound business plan with laser-like focus.
A business plan allows entrepreneurs to replace sometimes faulty assumptions with facts before making the decision to go into business. The planning process forces entrepreneurs to ask and then answer some difficult, challenging, and crucial questions .

ENTREPRENEURIAL
PROFILE _
Tom Szaky: TerraCycle

In his freshman year at Princeton, Tom Szaky created a business plan that helped him
launch TerraCycle International, a company that uses red worms to compost food waste into potting soil and liquid all-natural fertilizers guaranteed not to burn plants. Szaky’s ingenious plan was to sell waste disposal services to restaurants, schools, penitentiaries, and other institutions and to allow the worms to transform the waste into vermicompost, which the company turns into potting soil and fertilizers and sells to garden centers, nurseries, home superstores, and other retail outlets. Szaky’s re­ search told him that the organic segments of the fertilizer and potting soil industry are multibillion-dollar businesses and have been growing at double-digit rates for the last several years. TerraCycle sells its all-natural plant foods and other products through retail outlets across the United States and is planning to expand into global markets as well. Szaky not only used his business plan to make TerraCycle a success, but, in the early days of the company, he used it as a source of financing, entering numerous business plan competitions to win prize money that kept the young com-
pany afloat.91 •

Manage Financial Re _urces
The best defense against financial problems is to develop a practical information system and then use this information to make business decisions. No entrepreneur can maintain control over a business unless he or she is able to judge its financial health.
The first step in managing financial resources effectively is to have adequate start-up capital. Too many entrepreneurs begin their businesses with too little capital. One experienced business owner advises, “Estimate how much capital you need to get the business going and then double that figure.” His point is well taken; it almost always costs more to launch a business than any entrepreneur expects.
The most valuable financial resource to any small business is cash. Although earning a profit is essential to its long-term survival, a business must have an adequate supply of cash to pay its bills and obligations. Some entrepreneurs count on growing sales to supply their company’s cash needs, but this almost never happens . Growing companies usually consume more cash than they generate, and the faster they grow, the more cash they gobble up! Business history is littered with failed companies whose founders had no idea how much

THE FOUNDATIONS OF ENTREPRENEURSHIP

cash their businesses were generating and were spending cash as if they were certain there was “plenty more where that came from.”

Understand Financial Statements
Every business owner must depend on records and financial statements to know the condition of his or her business. All too often entrepreneurs use these only for tax purposes and not as vital management control devices. To truly understand what is going on in their business, an owner must have at least a basic understanding of accounting and finance.
When analyzed and interpreted properly, these financial statements are reliable indicators of a small firm’s health. They can be quite helpful in signaling potential problems. For example , declining sales, slipping profits , rising debt, and deteriorating working capital are all symptoms of potentially lethal problems that require immediate attention.

Learn to Manage People Effectively
No matter what kind of business you launch, you must learn to manage people. Every business depends on a foundation of well-trained , motivated employees. No business owner can do everything alone. The people an entrepreneur hires ultimately determine the heights to which the company can climb-or the depths to which it can plunge. Attracting and retaining a corps of quality employees is no easy task , however. It remains a challenge for every small business owner. “In the end, your most dominant sustainable resource is the quality of the people you
have ,” says one small business expert.92

Set Your Business Apart from the Competition
The formula for almost certain business failure involves becoming a “me-too business” – merely copying whatever the competition is doing . Most successful entrepreneurs find a way to convince their customers that their companies are superior to their competitors even if they sell similar products or services. It is especially important for small companies going up against larger, more powerful rivals with greater financial resources. Ideally, the basis for differentiating a company from its competitors is founded in what it does best. For small companies, that basis often is customer service, convenience, speed, quality, or whatever else is important to attracting and keeping happy customers .

Maintain a Positive Attitude
Achieving business success requires an entrepreneur to maintain a positive mental attitude toward business and the discipline to stick with it. Successful entrepreneurs recognize that their most valuable resource is their time, and they learn to manage it effectively to make themselves and their companies more productive. None of this , of course, is possible without passion-passion for their businesses, their products or services, their customers, their communities. Passion is what enables a failed business owner to get back up, try again, and make it to the top! One business writer says that growing a successful business requires entrepreneurs to have great faith in themselves and their
ideas, great doubt concerning the challenges and inevitable obstacles they will face as they build their businesses, and great effort-lots of hard work-to make their dreams become reality .93

Conclusion
As you can see, entrepreneurship lies at the heart of this nation’s free enterprise system; small companies truly are the backbone of our economy. Their contributions are as many and as diverse as the businesses themselves. Indeed, diversity is one of the strengths of the U.S. small

27

THE FOUNDATIONS OF ENTREPRENEURSHIP

business sector. Although there are no secrets to becoming a successful entrepreneur , there are steps that entrepreneurs can take to enhance the probability of their success.
As you can see, the journey down the road of entrepreneurship will be an interesting and exciting one. Let’s get started!

…

Chapter Summary
1. Define the role of the entrepreneur in business in the United States and around the world.
Entrepreneurship is thriving in the United States, but the current wave of entrepreneurship is not limited to the United States; many nations across the globe are seeing similar growth in their small business sectors.A variety of competitive, economic, and demographic shifts have created a world in which “small is beautiful.”
Capitalist societies depend on entrepreneurs to pro­ vide the drive and risk-taking necessary for the system to supply people with the goods and services they need .
2. Describe the entrepreneurial profile and evaluate your potential as an entrepreneur.
Entrepreneurs have some common characteristics, including a desire for responsibility, a preference for moderate risk, confidence in their ability to succeed, desire for immediate feedback, a high energy level,

28

a future orientation, skill at organizing, and a value of achievement over money. In a phrase, they are tenacious high achievers.
3-A. Describe the benefits of entrepreneurship.
Driven by these personal characteristics, entrepreneurs establish and manage small businesses to gain control over their lives, make a difference in the world, become self-fulfilled, reap unlimited profits, contribute to society, and do what they enjoy doing.
3-B. Describe the drawbacks of entrepreneurship.
Entrepreneurs also face certain disadvantages, includ­ ing: uncertainty of income, the risk of losing their investments (and more), long hours and hard work, a lower quality of life until the business gets established, high stress levels, and complete decision-making responsibility.

Last Completed Projects