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Managing Start-Ups and New Ventures  99

CHAPTER 6

MANAGING START-UPS AND NEW VENTURES

CHAPTER OUTLINE
Do You Think Like an Entrepreneur?
I. What Is Entrepreneurship?
II. Impact of Entrepreneurial Companies
A. Entrepreneurship Internationally
B. Entrepreneurship in the United States
III. Who Are Entrepreneurs?
A. Minority-Owned Businesses
B. Women-Owned Businesses
C. Traits of Entrepreneurs
IV. Social Entrepreneurship
V. Launching an Entrepreneurial Start-Up
A. Starting with an Idea
B. Writing the Business Plan
C. Choosing a Legal Structure
D. Arranging Financing
New Manager Self-Test: Perceived Passion
A. Tactics for Becoming a Business Owner
B. Starting an Online Business

ANNOTATED LEARNING OBJECTIVES


After studying this chapter, students should be able to:

1. Define entrepreneurship and the four classifications of entrepreneurs.


Entrepreneurship is the process of initiating a business venture, organizing the necessary
resources, and assuming the associated risks and rewards. They can be classified into five
categories.

 Idealists who like the idea of working on something new, creative, and personally
meaningful.
 Optimizers who are rewarded by the personal satisfaction of being business owners.
 Sustainers who like the chance to balance work and personal life and don’t want the
business to grow too large.
 Hard workers who enjoy putting in the long hours and dedication to build a larger, more
profitable business.
 Jugglers who like the chance a small business gives them to handle everything themselves.

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100  Chapter 6

2. Describe the importance of entrepreneurship to the global and U.S. economies.

Globally, entrepreneurship has experienced a tremendous boost due to huge advances in


technology and the rapid expansion of the middle class in developing nations.

In the U.S., the impact of entrepreneurial companies is astonishing. Small businesses create
two out of every three new jobs. They represent 98 percent of all businesses in the United
States. Small businesses also represent 97 percent of America’s exporters and produce 30.2
percent of all export value.

3. Summarize the impact of minority- and women-owned businesses.

As the minority population of the United States has grown, so has the number of minority-
owned businesses. The number of minority-owned businesses accounts to a total of 5.8
million firms, according to the most recent data available. The types of businesses launched
by minority entrepreneurs are also increasingly sophisticated.

Women are also embracing entrepreneurial opportunities in greater numbers. However, most
businesses don’t grow as they do not hire people. Another challenge faced by women is the
stark imbalance of the sexes in high-tech fields.

4. Define the personality characteristics of a typical entrepreneur.

Six personality traits associated with entrepreneurship have special importance.

Autonomy. Entrepreneurs driven by the desire for autonomy cherish the freedom of making
their own decisions about their business. Because of this desire, they consider flying solo,
without partners or significant investors. It may affect the firm’s development. It is best for
start-ups to forego autonomy and be managed by someone with a different set of managerial
skills.

Entrepreneurial Sacrifice: The ability to persevere and stay positive after long periods of
struggle is another common trait among entrepreneurs.

High energy. Most entrepreneurs report struggle and hardship, but they persist and work
incredibly hard. High levels of passion also help them overcome traumas and obstacles.
Nearly half of small business owners work more than a regular 40 hours per week.

Need to achieve. The need to achieve is a human quality linked to entrepreneurship that
means people are motivated to excel and pick situations in which success is likely. People
with high achievement needs like to set their own goals that are moderately difficult.

Self- confidence. People who start and run a business must act decisively and need
confidence about their ability to master the day-to-day tasks of the business. Entrepreneurs
have a general feeling of confidence that they can deal with any complex, unanticipated
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Managing Start-Ups and New Ventures  101

problems that may arise.

Locus of control defines whether a person places the primary responsibility for what happens
to him or her within the self (internal locus of control) or on outside forces (external locus of
control).
.

5. Explain social entrepreneurship as a vital part of today’s small business environment.

Social entrepreneurs are people who are committed to both good business and positive social
change. They create new business models that meet critical human needs and solve important
problems that remain unsolved by current economic and social institutions.

Social entrepreneurship combines the creativity, business smarts, passion, and hard work of the
traditional entrepreneur with a mission to change the world for the better. Though not new,
social entrepreneurship has blossomed over the past 20 or so years. The innovative organizations
created by social entrepreneurs are defying the traditional boundaries between business and
welfare.

6. Outline the planning necessary to launch an entrepreneurial start-up.

Starting with an Idea – skill and market need must both be present
Writing the Business Plan – a document specifying the business details prepared by an
entrepreneur prior to opening a new business
Choosing a Legal Structure
- Sole proprietorship – an unincorporated business owned by an individual for profit
- Partnership – an unincorporated business owned by two or more people
- Corporation – an artificial entity created by the state that exists apart from its owners
Arranging Financing
- Debt Financing – borrowing money that has to be repaid at a later date
- Equity Financing – funds that are invested in exchange for ownership in the company either
by owners or those who buy stock in the company

7. Describe tactics for becoming a business owner, including buying a franchise and starting an
online business.

Start-up. In the initial stage, the main problems are producing the product or service and funding
the business. Key issues are attracting enough customers and money to survive.

Survival. In this stage, the business demonstrates that it is a workable business entity that
produces a product or service and has sufficient customers. Concerns are generating sufficient
cash flow and making sure that revenues exceed expenses.
Success. The company is solidly based and profitable at this stage. Systems and procedures are
in place and they allow the owner to slow down if desired or consider turning the business over
to professional managers.
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102  Chapter 6

Takeoff. In the fourth stage, the problem is how to grow rapidly and finance that growth. The
owner must learn to delegate, and the company must find sufficient capital to invest in major
growth.

Resource maturity. At this stage, the company has made substantial financial gains and has the
staff and resources to develop detailed planning and control systems, but may lose the
advantages of small size, including flexibility and the entrepreneurial spirit.

8. Explain how the management activities of planning, organizing, decision making, and
controlling apply to a growing entrepreneurial company.

In the early start-up stage, formal planning tends to be nonexistent except for the business plan.
The primary goal is to stay alive. Formal planning usually is not instituted until the success
stage. The growing importance of e-business means entrepreneurs have to plan and allocate
resources for Internet operations from the beginning and grow those plans as the company
grows.

In the first two stages of growth, the organization’s structure is very informal, with all employees
reporting to the owner. At about the success stage, functional managers begin to evolve to
manage finance, manufacturing, and marketing. During the takeoff and resource maturity stages,
managers must learn to delegate and decentralize authority. As an organization grows, it may be
characterized by greater use of rules, procedures, and written job descriptions.

When managing a growing business, owners face masses of decisions that affect the performance
of the organization. These decisions may include determining inventory levels, hiring new
employees, choosing a domain name for a website, or expanding into a new market. Sometimes
the decisions are easy to make. Every decision has the potential to alter the direction and success
of the business.

Financial control is important in each stage of a firm’s growth. In the start-up and survival
stages, control is exercised by simple accounting records and personal supervision. By the
success stage, operational budgets are in place and the owner should start implementing more
structured control systems. During the takeoff stage, the company will need to make greater use
of budgets, standard cost systems, and computers to provide statistical reports. These techniques
will become more sophisticated during the resource maturity stage.

LECTURE OUTLINE
DO YOU THINK LIKE AN ENTREPRENEUR?

Entrepreneurs face many demands. Improvisation is a correlate of entrepreneurial intentions.


Entrepreneurial improvisation consists of three elements: the ability to produce novel solutions
under constrained conditions; the ability to excel under pressure-filled circumstances; and the
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Managing Start-Ups and New Ventures  103

determination to achieve goals and solve problems in the moment. This exercise helps students
determine whether they have the inclination to start and build their own businesses.

I. WHAT IS ENTREPRENEURSHIP? Exhibit 6.1

Entrepreneurship is the process of initiating a business venture, organizing the necessary


resources, and assuming the associated risks and rewards. An entrepreneur recognizes a
viable idea for a business product or service and carries it out by finding and assembling the
necessary resources—money, people, machinery, and location—to undertake the business
venture.

Entrepreneurs have many different motivations and measure rewards in different ways. They
can be classified into five categories.

 Idealists who like the idea of working on something new, creative, and personally
meaningful.
 Optimizers who are rewarded by the personal satisfaction of being business owners.
 Sustainers who like the chance to balance work and personal life and don’t want
the business to grow too large.
 Hard workers who enjoy putting in the long hours and dedication to build a larger,
more profitable business.
 Jugglers who like the chance a small business gives them to handle everything
themselves.

Many people regard entrepreneurship as a better use of their time, talent, and energy. Women
and minorities, who have found corporate opportunities more limited, often see
entrepreneurship as the only way to go.

Discussion Question #2: Over the past 20 years, entrepreneurship has been the fastest-
growing course of study on campuses throughout the United States. Do you think it is possible
to teach someone to be an entrepreneur? Why or why not?

NOTES________________________________________________________________________
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II. Impact of Entrepreneurial Companies

Small businesses have been hit particularly hard by the global economic crisis and weak
consumer demand. But rejuvenation in the economy is underway, and small businesses and
entrepreneurs are the engine behind the rebound that’s occurring in many markets.

A. Entrepreneurship Internationally Exhibit 6.2


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1. Globally, entrepreneurship has experienced a tremendous boost due to huge advances


in technology and the rapid expansion of the middle class in countries such as China
and India. Entrepreneurship in other countries is also booming.

2. The rate of entrepreneurial activity among women surpassed the rate among men in
Panama and Thailand and was about equal in Ghana, Ecuador, Nigeria, Mexico, and
Uganda. However, the opportunities for women across regions are uneven.

B. Entrepreneurship in the United States

1. The impact of entrepreneurial companies on the U.S. economy is astonishing. In the


United States, small businesses create two out of every three jobs. Small businesses
represent 98 percent of all businesses

2. in the United States. Entrepreneurship and small businesses are the engines behind
job creation and innovation.

Discussion Question #8: Many people who are successful at the start-up stage of a business are
not the right people to carry the venture forward. How do you decide whether you’re better
suited to be a serial entrepreneur (start the business and then move on to start another), or
whether you can guide the venture as it grows and matures?

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III. WHO ARE ENTREPRENEURS?

The heroes of American business—Henry Ford, Steve Jobs, Sam Walton, Bill Gates, Oprah
Winfrey, and Mark Zuckerberg—are almost always entrepreneurs, but the image of
entrepreneurs as bold pioneers is probably overly romantic. Most entrepreneurs can best be
characterized as hardworking and practical, with great familiarity with their market and
industry.

A. Minority-Owned Businesses Exhibit 6.3

1. As the minority population of the United States has grown, so has the number of
minority-owned businesses. The number of minority-owned businesses increased by
45.6 percent between 2002 and 2007, to 5.8 million firms, according to the most
recent data available. More minorities are looking to control their destiny by
establishing themselves in the U.S.

2. The types of businesses launched by minority entrepreneurs are also increasingly


sophisticated. The traditional retail stores or restaurants are replaced by firms in
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Managing Start-Ups and New Ventures  105

industries such as financial services, insurance, and online businesses.

B. Women-Owned Businesses Exhibit 6.4

1. Women are also embracing entrepreneurial opportunities in greater number in a range


of industries like business services, health care, and communication. However, most
businesses don’t grow if they do not hire people, and women try to do everything
themselves.

2. Women also tend to be more cautious than men about borrowing money, which
limits growth opportunities, particularly in high-tech fields.

3. As the cost of launching technology-related businesses falls, more women are taking
a gamble in this competitive market.

Discussion Question #3: Why would small business ownership have great appeal to immigrants,
women, and minorities?

NOTES________________________________________________________________________
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C. Traits of Entrepreneurs Exhibit 6.5

1. In general, entrepreneurs seem to want something different from life than do


traditional managers. Seven personality traits associated with entrepreneurship have
special importance.

a. Autonomy. The desire for autonomy is reportedly the primary motivator for
pursuing an entrepreneurial life. The freedom of making their own decisions
about their business drives the desire for autonomy in entrepreneurs. Because of
this desire, they consider flying solo, without partners or significant investors. It
may affect the firm’s development. It is best for start-ups to forego autonomy and
be managed by someone with a different set of managerial skills.

b. Entrepreneurial Sacrifice. The ability to persevere and stay positive after long
periods of struggle is another common trait among entrepreneurs.

c. High energy. A business start-up requires great effort. Most entrepreneurs report
struggle and hardship, but they persist and work incredibly hard despite traumas
and obstacles. In a recent survey, it was found that 43 percent of small business
owners work more than a regular 40-hour week, 31 percent reported working
during holidays, and 13 percent said they regularly worked for more than 80 hours
a week. Entrepreneurial passion in people can be recognized by their unwavering
belief in a dream, intense focus, and unconventional risk taking.

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106  Chapter 6

d. Need to achieve. The need to achieve is a human quality linked to


entrepreneurship that means people are motivated to excel and pick situations in
which success is likely. People with high achievement needs like to set their own
goals that are moderately difficult.

e. Self- confidence. People who start and run a business must act decisively and
need confidence about their ability to master the day-to-day tasks of the business.
Entrepreneurs have a general feeling of confidence that they can deal with any
complex, unanticipated problems that may arise.

f. Locus of control defines whether a person places the primary responsibility for
what happens to him or her within the self (internal locus of control) or on outside
forces (external locus of control).

Discussion Question #4: Consider the seven characteristics of entrepreneurs described in the
chapter. Which two traits do you think are most like those of managers in large companies?
Which two are least like those of managers in large companies?

NOTES________________________________________________________________________
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IV. SOCIAL ENTREPRENEURSHIP

Social entrepreneurs are people who are committed to both good business and positive
social change. They create new business models that meet critical human needs and solve
important problems that remain unsolved by current economic and social institutions.

Social entrepreneurship combines the creativity, business smarts, passion, and work of the
traditional entrepreneur with a mission to change the world for the better. Though not new,
social entrepreneurship has blossomed over the past 20 or so years.

In the United States, several states have adjusted their incorporation laws to create a new
corporate structure known as a “benefit corporation” for entrepreneurs who want to include a
strong social or environmental component to their for-profit business. The new form provides
legal protection for entrepreneurs to consider the local community in corporate decisions, not
just shareholders.

Discussion Question #1: Social entrepreneurship is a growing phenomenon. Do you believe that
for-profit businesses can have a social mission? Should they do so, if it means hurting profits?

NOTES_______________________________________________________________________
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______________________________________________________________________________
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Managing Start-Ups and New Ventures  107

V. LAUNCHING AN ENTREPRENEURIAL START-UP

A. Starting with an Idea Exhibit 6.6

1. Some people are inspired to choose entrepreneurship by exciting ideas. Others decide
to start their own businesses and go looking for an idea. The trick for entrepreneurs is
to blend their own skills and experience with a need in the marketplace. Past job
experiences also influence an entrepreneur to come up with new business ideas.

2. The trick for entrepreneurs is to blend their own skills and experience with
a need
in the marketplace.

B. Writing the Business Plan

1. A business plan is a document specifying the business details prepared by an


entrepreneur prior to opening a new business. Planning forces the entrepreneur to
carefully think through the issues and problems associated with starting and
developing the business. The details may vary, but successful business plans generally
share several characteristics:

a. Demonstrate a clear, compelling vision that creates an air of excitement.

b. Provide clear and realistic financial projections.

c. Profile potential customers and the target market.

d. Include detailed information about the industry and competitors.

e. Provide evidence of an effective entrepreneurial management team.

f. Pay attention to good formatting and clear writing.

g. Keep the plan short—no more than 50 pages.

h. Highlight critical risks that may threaten business success.

i. Spell out the sources and uses of start-up funds and operating funds.

j. Capture the reader’s interest with a killer summary.

2. Starting a business is a rewarding and complex process that starts with good planning,
preparation, and insight. A well-crafted business plan summarizes the road map for
success.

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108  Chapter 6

Discussion Question #6: Many successful entrepreneurs say that they did little planning,
perhaps scratching notes on a legal pad. How was it possible for them to do well, even so?

NOTES________________________________________________________________________
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C. Choosing a Legal Structure

1. Sole Proprietorship

a. A sole proprietorship is an unincorporated business owned by an individual for


profit. Proprietorships make up the majority of businesses in the United States.
This form is popular because the proprietor has total ownership and control of the
company and there are few legal requirements; however, the owner also has
unlimited liability for the business, placing the owner’s personal as well as
business assets at risk.

2. Partnership

a. A partnership is an unincorporated business owned by two or more people.


Partnerships, like proprietorships, are relatively easy to start. Formal partnership
agreements are a good idea to make sure the business is well planned and to avoid
misunderstandings between the partners. Like sole proprietors, partners also have
unlimited liability, putting their personal and business assets at risk.

3. Corporation

a. A corporation is an artificial entity created by the state that exists apart from its
owners. As a separate legal entity, the corporation is liable for its actions and
must pay taxes on its income; it has a legal life of its own and continues to exist if
the owners live or die. Personal assets of the owners are not at risk. However, it
is expensive and complex to do the paperwork required to incorporate the
business and to keep the records required by law.

D. Arranging Financing Exhibit 6.7

Most entrepreneurs are particularly concerned with financing the business. An investment
is required to acquire labor and raw materials, and perhaps a building and equipment as
well. The financing decision initially involves two options—whether to obtain loans that
must be repaid (debt financing) or whether to share ownership (equity financing).

1. Debt Financing

a. Borrowing money that has to be repaid at a later date to start a business is referred
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Managing Start-Ups and New Ventures  109

to as debt financing. Common sources of debt financing include borrowing


money from family and friends, bank loans, and SBA loans.

b. Angel financing refers to financing from wealthy individuals who believe in the
idea for a start-up and are willing to invest their personal funds and provide
advice and assistance to the entrepreneur to help the business get started.

2. Equity Financing

a. Equity financing consists of funds that are invested in exchange for ownership in
the company either by owners or those who buy stock in the company.

b. A venture capital firm is a group of companies or individuals that invest money


in new or expanding businesses for ownership and potential profits. Venture
capitalists are interested in high-tech businesses such as biotechnology, innovative
online ventures, or telecommunications because they have a potential for high
rates of return on investment.

c. Crowdfunding is a way of raising capital by receiving small amounts of money


from a large number of investors, usually through social media and the Internet.

Discussion Question #10 Describe the benefits of using social media to help a start-up gain
traction during the early stages of its life cycle. What are some possible disadvantages of
using social media?

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NEW MANAGER SELF-TEST: PERCEIVED PASSION

An entrepreneur starting a business often has to make presentation to investors in order to


raise money. This test measures the persuasiveness of presentations to venture capitalists by
entrepreneurs in an effort to obtain investment money. Two aspects of the presentation
measured are passion and preparedness. Preparedness has the most positive impact on
decisions to invest money with entrepreneurs. Thus, a higher score on preparedness is more
important to investors than a high score on presentation passion.

A. Tactics for Becoming a Business Owner

Aspiring entrepreneurs can become business owners in several different ways. They can
start a new business from scratch, buy an existing business, start a franchise, or
participate in a business incubator.

1. Start a New Business


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110  Chapter 6

a. This approach is exciting to an entrepreneur who sees a need for a product or


service that has not been filled before and then sees the idea or dream become a
reality.

b. The advantage is the ability to design and develop the business the way the owner
wants it to be.

c. The disadvantage is the time, money, and effort necessary to make the business
profitable.

2. Buy an Existing Business

a. Purchasing an existing business offers the advantage of a shorter time to get


started and an existing track record. An established business already has filing
systems, a payroll tax system, and other operating procedures.

b. The disadvantages are the need to pay for goodwill the owner believes exists and
the possible existence of ill will toward the business, bad practices, or outdated
technology.

3. Buy a Franchise Exhibit 6.8

a. Franchising is perhaps the most rapidly growing path to entrepreneurship.


Franchising is a business arrangement where a firm collects upfront and ongoing
fees in exchange for other firms to offer products and services under its brand
name and using its processes. The franchisee invests his or her own money and
owns the business but does not have to develop a new product, create a new
company, or test the market. The big advantage of a franchise is that management
help is provided by the franchisor. The biggest disadvantages are potential high
start-up costs followed by monthly payments to the franchisor and limited
freedom for the franchisee to manage in his or her own way.

Discussion Question #7: What personal skills do you need to keep your financial backers
feeling confident in your new business? Which skills are most useful when you’re dealing with
more informal sources such as family and friends versus receiving funds from stockholders, a
bank, or a venture capital firm? Would these considerations affect your financing strategy?

NOTES________________________________________________________________________
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4. Participate in a Business Incubator

a. A business incubator typically provides shared office space, management


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Managing Start-Ups and New Ventures  111

support services, and management and legal advice to entrepreneurs. Incubators


also give entrepreneurs a chance to share information with one another about local
business, financial aid, and market opportunities.

b. Virtual incubators do not require entrepreneurs to set up on-site. They connect


entrepreneurs with a wide range of experts and mentors and offer lower overhead
and cost savings for cash-strapped small business owners.

B. Starting an Online or Mobile Ap Business

1. Many entrepreneurs are turning to the Internet to expand their small businesses or
launch new ventures. Anyone with an idea, a personal computer, access to the
Internet, and the tools to create a website can start an online business. Two incentives
for starting an online business include low overhead and the ability to work from
home or any location.

2. An even more rapidly growing area of new business formation is the app
boom. Mobile devices have inspired a new generation of entrepreneurs

3. Several steps required to start an online business are highlighted below.

a. Find a market niche. To succeed in the competitive online market, aspiring


entrepreneurs need to identify a market niche that isn’t being served by other
companies.

b. Create a professional website. To improve customers’ online experience,


websites should be easy to navigate, intuitive, and offer menus that are easy to
read and understand.

c. Choose a domain name. Domain names should be chosen carefully and be easy
to remember, pronounce, and spell.

d. Know when to pivot. One of the biggest mistakes that new


entrepreneurs make is in not
knowing when to pivot, which means to change the strategic
direction of the business.

e. Use social media. Social media sites have the potential to be powerful tools for
small business owners. The advantages include gaining valuable feedback on
products and services, building communities of loyal followers, and promoting
special events and pricing.

Discussion Question #5: By the time that an online or mobile business starts noticeably losing
customers, it is often too late to turn things around. If you were the creator of a successful game
app, such as Angry Birds or iShoot, how might you know when it was time to pivot in order to
keep thriving?
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112  Chapter 6

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Suggested Answers to Discussion Questions

1. Social entrepreneurship is a growing phenomenon. Do you believe that for-profit businesses


can have a social mission? Should they do so, if it means hurting profits?

For-profit businesses can have a social mission. In fact, today’s consumers have a growing
expectation that organizations will operate in socially responsible ways. For this reason, a new
breed of business is emerging that is motivated to help society solve all types of social
problems, including environmental pollution, global hunger, and deaths from treatable
diseases. For example, a company like Home Depot is donating a portion of its sales for
breast cancer research. This does not hurt profits because consumers are more likely to shop at
Home Depot because of its social mission. Social entrepreneurship enhances rather than
detracts from generating profits.

In the United States, several states have adjusted their incorporation laws to create a
new corporate structure known as a “benefit corporation” for entrepreneurs who want to
include a strong social or environmental component to their for-profit business. The new form
provides legal protection for entrepreneurs to consider the local community in corporate
decisions, not just shareholders. More than 200 for-profit businesses, from microbrewers to
outdoor-clothing maker Patagonia, have converted to benefit corporations in recent years.

2. Over the past 20 years, entrepreneurship has been the fastest-growing course of study on
campuses throughout the United States. Do you think it is possible to teach someone to be
an entrepreneur? Why or why not?

Students’ opinions will differ. Some people seem to have a knack for entrepreneurship, much
the same way some people have a knack for sports or other activities. That would seem to
support an argument that people are “born” to be entrepreneurs; however, it is certainly true
that the business techniques related to entrepreneurship can be taught and mentors can help
struggling entrepreneurs learn to employ those techniques better. To that extent,
entrepreneurship can be taught.

3. Why would small business ownership have great appeal to immigrants, women, and
minorities?

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Managing Start-Ups and New Ventures  113

Many established corporations have informal barriers to top management for these groups. It
is human nature to hire and promote persons who are like you, and that usually excludes
immigrants, women, and other minorities. Small-business ownership provides these persons
with the opportunity to be their own bosses and to go as far as they are able to go based on
their own drive and abilities rather than on social barriers.

4. Consider the six characteristics of entrepreneurs described in the chapter. Which two
traits do you think are most like those of managers in large companies? Which two are
least like those of managers in large companies?

Self-confidence and need to achieve may be most likely to also be found in managers in large
companies. High energy and high tolerance for ambiguity are probably least likely to be
found in managers in large companies.

5. By the time that an online or mobile business starts noticeably losing customers, it is often
too late to turn things around. If you were the creator of a successful game app, such as
Angry Birds or iShoot, how might you know when it was time to pivot in order to keep
thriving?

One of the biggest mistakes that new entrepreneurs make is in not knowing when to pivot,
which means to change the strategic direction of the business. Technology entrepreneurs may
cycle through several ideas for a new business before ultimately landing on the one that takes
off. Even after initial success, there will be times when the business needs to change course.
Starting something, determining it’s not working, and then leveraging aspects of that
technology is extremely powerful. Each business will have to determine whether or
not it is able to thrive based on the measurable criteria set forth in the planning
process. The criteria might include metrics such profit level, number of
customers, level of competition, or other technological advances.

6. Many successful entrepreneurs say that they did little planning, perhaps scratching notes
on a legal pad. How was it possible for them to do well, even so?

If an entrepreneur comes up with a product or service that is needed and not being supplied,
this demand can often be strong enough to compensate for the lack of planning. It may also
make up for other mistakes that are made. If planning had been done, chances are the
success of these entrepreneurs would have been even more spectacular. Not planning is a
chance that one should not take.

7. What personal skills do you need to keep your financial backers feeling confident in your
new business? Which skills are most useful when you’re dealing with more informal
sources such as family and friends versus receiving funds from stockholders, a bank, or a
venture capital firm? Would these considerations affect your financing strategy?

Communication skills and persuasion skills would be very important in maintaining financial
backers’ confidence. You would need good communication skills to keep them informed of
your progress, of any changes in plans that have been made necessary along the way, and of
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114  Chapter 6

your ongoing expectations for success. Persuasion skills would be especially important when
things do not go as well as expected, which is almost always the case in some respects. At
that point, you would need to be able to persuade your financial backers that their investment
is still sound.

With family and friends you can probably rely more on the strength of the relationship itself
to keep people interested. Although you will still need to keep them informed and confident
of your ability to succeed, they will be much more likely to believe in you because of the
closeness they feel, and will be slower to lose confidence. Of course, if the business fails and
the investments are lost, you also risk losing those valued relationships. Formal sources of
funds (stockholders, bank, or venture capital firm) will want to see organization and
planning, as well as formally prepared financial reports. If you are a less formal or less
organized person, or a more relationship-oriented person, you will probably look for financial
backing from family and friends. If you are a detailed planner with good organizational
skills and feel more comfortable with formal business relationships, you will probably seek
your financial backing from stockholders, banks, and/or a venture capital firm.

8. Many people who are successful at the start-up stage of a business are not the right people
to carry the venture forward. How do you decide whether you’re better suited to be a
serial entrepreneur (start the business and then move on to start another), or whether you
can guide the venture as it grows and matures?

The early stages of a new business require tremendous energy as the owner handles nearly all
of the tasks by himself or herself. Even as the company begins to grow somewhat and hire a
few others, the owner may still be the only manager. These early stages are well suited to
individuals who want to be in charge and have the freedom and flexibility to do what they
want to when they want to do it with regard to the company and their own schedules. Those
same individuals may begin to feel constrained by their responsibilities as the company
moves into the success stage of growth. Moreover, they may find it difficult to delegate
management to others and, though highly motivated themselves, may not be interested in or
able to motivate others.

A person who wants a great deal of freedom and flexibility, or a high-energy idea person with
excellent task skills but less exceptional people skills, would be better suited to be a serial
entrepreneur. A person whose vision is to create a large company, or a person who has the
task skills to get the business going but also has strong interpersonal skills and wants the
stability of staying with the new business instead of going through the difficulty of starting
something new every few years would be better suited to staying with the original start-up
throughout its growth to maturity.

9. How does starting an online business differ from starting a small business such as a local
auto repair shop or delicatessen? Is it really possible for businesses that operate totally in
cyberspace to build close customer relationships? Discuss.

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Managing Start-Ups and New Ventures  115

Starting an Internet business requires lower start-up capital because the initial “bricks and
mortar” investment can be nonexistent. At the beginning, it may only require Web space and
alliances with other companies to supply, store, and deliver products. If it is a service
provider, the Internet company could be entirely online. An auto repair shop or small
delicatessen would involve renting, leasing, or buying real assets such as a building,
equipment, and/or inventory and supplies. This type of investment would require increased
start-up capital, marketing research, and production planning.

Building a successful online business requires, at minimum, start-up capital for the necessary
computer equipment to go online and to promote the business. Fast, efficient service with a
customer-driven approach can create a successful online service without partnering and/or
strategic alliances with other companies. Online product providers should participate in
vertical and horizontal integration with other businesses when it is economically feasible.
Each business opportunity must be weighed and analyzed before any decision is made for
this type of integration.

It takes a great deal of time and energy to develop close customer relationships for a business
operating totally in cyberspace, but it can be done.

10 Describe the benefits of using social media to help a start-up gain traction during the
early stages of its life cycle. What are some possible disadvantages of using social media?

Social media sites, such as Facebook, Twitter, and YouTube have the potential to be powerful
tools for small business owners. The benefits of using social media include gaining valuable
feedback on products and services, building communities of loyal followers, and promoting
special events and pricing. For some start-ups, social media will help them grow and for
others it is the basis of business. Some of the possible disadvantages of using social media
include negative publicity, privacy and security issues, time consuming, and government
restrictions.

Apply Your Skills: Experiential Exercise

What’s Your Entrepreneurial IQ?

Students should total the score for the 15 items. A score of 50-60 points suggests a strong
entrepreneurial IQ is acquired. A score of 30-50 indicates good entrepreneurial possibilities.
The chance of starting a successful entrepreneurial business is good if the student has the desire
and motivation. If the score is below 30, the student probably doesn’t have much entrepreneurial
potential.

Apply Your Skills: Small Group Breakout

What Counts?

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116  Chapter 6

This exercise asks students to rank eight qualities experts suggest are required to be a successful
entrepreneur from most important to least important. Students share their rankings in groups,
then create a single ranking for the group as a whole, and discuss questions provided in the
exercise.

Apply Your Skills: Ethical Dilemma

Closing the Deal

1. Say nothing about the false numbers. Of course, the company will miss the projections and
have to come up with a good explanation, but after all, isn’t that par for the course among
fledgling high-tech companies? Chances are the whole thing will blow over without a
problem.

This course of action could lead to legal problems for the firm and should not be taken.

2. Go ahead and close the deal, but come clean later. Explain that the controller had been on
an extended leave of absence and, because you had been on the job only a few days, you
had not had time to personally do an analysis of the numbers.

This option still requires knowingly misleading the investors. It could also lead to legal
problems and, therefore, is not a viable option.

3. Take swift action to notify the venture capitalists of the truth of the situation—and start
cleaning house to get rid of people who would knowingly lie to close a deal.

This is the only option there is to avoid potential legal issues later. Chuck Campbell should
come clean and take immediate action to notify investors, company personnel, etc. shortly
after being apprised of the error made. His reputation is at stake. He must have integrity,
ethics, and timeliness. Campbell should have a meeting with personnel affected by any
decisions forthcoming. He must deal with this issue honestly and forthrightly to prevent his
company from gaining a negative reputation.

Apply Your Skills: Case for Critical Analysis

Black-Jack Antiques

1. If you were Kevin how would you initiate a conversation with Jeremy? What would you
want to learn? What would you say?

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Managing Start-Ups and New Ventures  117

If I were Kevin, I would initiate the conversation by asking about the problems faced by
Jeremy and then ask about his planning for the future. I would learn about the problems faced
by Jeremy and try to convince him not to leave.

2. What does this case illustrate about the risks of starting a business with a partner? How
might those risks be minimized? Explain

This case illustrates the disadvantages of partnerships that include the unlimited liability of
the partners and the disagreements that occur among people. These risks can be minimized
by drawing up and signing a formal partnership agreement with the help of an attorney.

3. Do you think Kevin could make a go of the business alone? Should he try? Discuss.

Kevin could make a try at business alone if he is sure that the antique side of business can
carry all the weight. Kevin should try, even more so because he is not sure of other job
prospects.

On the Job Video Case Answers

Bissell Brothers brewing: Managing Start-Ups and New Ventures

1. What are some of the entrepreneurial traits found in the two Bissell brothers that help make
them successful? Are there any skills or traits you think they could improve upon?

 Autonomy Both brothers show the entrepreneurial trait of autonomy. They take pride
in developing, manufacturing, packaging, and distributing the beer themselves. While
most companies use established beer distributors for their products, the Bissell
brothers prefer to handle distribution themselves.

 High Energy. Both brothers show the entrepreneurial trait of high energy. They are
passionate about creating beer and making their company grow.

 Self-confidence The Bissell brothers have the entrepreneurial trait of self-confidence.


They did not have financial backgrounds---one was a photographer and the other a
psychology major in college----but they figured out how to get a bank loan with no
collateral and rent a business location well before the business was operational. Each
success gave them more self-confidence to try something new.

 Personal sacrifice. The brothers were willing to sacrifice personal gain to use their
profits for a down payment on a second location. The need for business growth
outweighed any personal needs. This is an entrepreneurial trait.

 Locus of control Both brothers take personal responsibility for the success or failure of
the business. They do their own trouble-shooting to find solutions to problems.

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118  Chapter 6

 Need to achieve. The entrepreneurial trait of needing to achieve could be improved


upon if the company is going to continue to grow. At a certain point, the Bissell
brothers will have to have more people in their operation and delegate more authority
to others.

2. How would you summarize the steps the brothers took to launch their business? What
challenges did they have to address?

The brothers started with an idea for which they had a passion---brewing beer. Then they
found someone to brew and experiment with different tastes, Then they wrote a business
plan. Then they secured a bank loan and rented a space for brewing. The challenge they faced
was paying rent on a location before the business was operational. They had to rent the space
for fear of losing it. Then they found investors. They faced the challenge of juggling the
brewing and distribution activities with the financial demands of running a business.

3. Which one of the business tactics described in the text did the Bissell brothers use to become
business owners? What are some possible reasons why they rejected the other options?

The Bissell brothers used the business tactic of starting a new business from scratch. This
approach was exciting for them because entrepreneurs see a need for a product or service that
has not been filled before and then see the idea or dream become a reality. The advantage of
starting a business was the ability to develop and design the business in their own way. The
Bissell brothers were solely responsible for their business’ success.

They rejected the other business options of buying an existing business or a franchise
because they felt that their product was unique. They saw a market niche and filled it. Also,
they didn’t have the capital to buy a business. The brothers faced an uphill battle caused by
the lack of an established clientele, but they turned this disadvantage into an advantage by
selling their beer at the local establishments in Portland that they frequented. As a result, they
carved out a reciprocal business arrangement. Local businesses supported them, and they
supported local businesses.

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