All Ppts Financial Module

Part I
The Entrepreneurial Mind-Set

in the 21st Century
Chapter 1
Entrepreneurship:
Evolutionary
Development—
Revolutionary Impact
PowerPoint Presentation by Charlie Cook
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a

publicly accessible website, in whole or in part.
Learning Objectives
• Identify the different types of risk entrepreneurs

face as well as major schools of entrepreneurial
thought
• Determine the concepts and principle
surrounding the revolutionary development of
entrepreneurship
• Compare and contrast using a Venn diagram the
approaches to entrepreneurship.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1–2
Entrepreneurs—Breakthrough Innovators
• Entrepreneurs
 Recognize opportunities where
others see chaos, contradiction,
or confusion
 Are aggressive catalysts for
change within the marketplace
 Challenge the unknown and
continuously create
breakthroughs for the future
Entrepreneurs versus
Small Business Owners: A Distinction
• Small Businesses Owners
 Manage their businesses by expecting
stable sales, profits, and growth
• Entrepreneurs
 Focus their efforts on innovation,
profitability and sustainable growth
Entrepreneurship: A Mind-Set
• Entrepreneurship is more than
the mere creation of business:
 Seeking opportunities
 Taking risks beyond security
 Having the tenacity to push
an idea through to reality
• Entrepreneurship is an integrated
concept that permeates an individual’s
business in an innovative manner.
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The Evolution of Entrepreneurship
• Entrepreneur is derived from the French
entreprendre, meaning “to undertake.”
 The entrepreneur is one who undertakes to organize,
manage, and assume the risks of a business.
 Although no single definition of entrepreneur exists
and no one profile can represent today’s
entrepreneurs, research is providing an increasingly
sharper focus on the subject.
A Summary Description
of Entrepreneurship
• Entrepreneurship (Robert C. Ronstadt)
 The dynamic process of creating incremental wealth.
 This wealth is created by individuals who assume
major risks in terms of equity, time, and/or career
commitment of providing value for a product or
service.
 The product or service itself may or may not be new or
unique but the entrepreneur must somehow infuse
value by securing and allocating the necessary skills
and resources.
An Integrated Definition
• Entrepreneurship
 A dynamic process of vision, change, and creation.
• Requires an application of energy and passion towards the
creation and implementation of new ideas and creative
solutions.
 Essential ingredients include:
• The willingness to take calculated risks—in terms of time,
equity, or career.
• The ability to formulate an effective venture team; the creative
skill to marshal needed resources.
• The fundamental skills of building a solid business plan.
• The vision to recognize opportunity where others see chaos,
contradiction, and confusion.
Avoiding Folklore:
The Myths of Entrepreneurship
• Myth 1: Entrepreneurs Are Doers, Not Thinkers
• Myth 2: Entrepreneurs Are Born, Not Made
• Myth 3: Entrepreneurs Are Always Inventors
• Myth 4: Entrepreneurs Are Academic and Social Misfits
• Myth 5: Entrepreneurs Must Fit the Profile
• Myth 6: All Entrepreneurs Need Is Money
• Myth 7: All Entrepreneurs Need Is Luck
• Myth 8: Entrepreneurship Is Unstructured and Chaotic
• Myth 9: Most Entrepreneurial Initiatives Fail
• Myth 10: Entrepreneurs Are Extreme Risk Takers
The Entrepreneurial Process
• Types of people involved with contemporary
small businesses:
 The entrepreneur who invents a business that works
without him or her.
 The manager who produces results through
employees by developing and implementing effective
systems and, by interacting with employees,
enhances their self-esteem and ability to produce
good results.
 The technician who performs specific tasks according
to systems and standards management developed.
Source: Adapted from Michael E. Gerber, The E-Myth Revisited: Why Most Businesses Don’t Work and What to Do About It (New York: Harper Collins,
1995, 2001) and personal interview.
1.1 Entrepreneurial Schools-of-Thought Approach
Table
Macro View: External Locus of Control
• The Environmental School of Thought
 Considers the external factors that affect a
potential entrepreneur’s lifestyle.
• The Financial/Capital School of Thought
 Based on the capital-seeking process—the search
for seed and growth capital.
• The Displacement School of Thought
 Alienation drives entrepreneurial pursuits
• Political displacement (laws, policies, and regulations)
• Cultural displacement (preclusion of social groups)
• Economic displacement (economic variations)
Micro View: Internal Locus of Control
• The Entrepreneurial Trait School of Thought
 Focuses on identifying traits common to successful
entrepreneurs.
• Achievement, creativity, determination, and technical
knowledge
• The Venture Opportunity School of Thought
 Focuses on the opportunity aspect of venture
development—the search for idea sources, the
development of concepts, and the implementation of
venture opportunities.
• Corridor principle: New pathways or opportunities will arise
that lead entrepreneurs in different directions.
Micro View… (cont’d)
• The Strategic Formulation School of Thought
 Emphasizes the planning process in successful
venture development.
 Strategic formulation is a leveraging of unique
elements:
• Unique Markets—mountain gap strategies
• Unique People—great chef strategies
• Unique Products—better widget strategies
• Unique Resources—water well strategies
Process Approaches to Entrepreneurship
• An Integrative Approach
 Built around the concepts of input to the
entrepreneurial process and outcomes from
the entrepreneurial process.
Process Approaches… (cont’d)
• Dynamic States Approach
 Stresses dependency of venture on environment and
the interaction of:
• The dominant logic of the firm
• The business model
• Value creation
Process Approaches… (cont’d)
• A Framework of Frameworks Approach
 Offers a more dynamic view of entrepreneurship.
 Allows for the profession to move forward.
 Identifies the static and dynamic elements of new
theories, typologies, or frameworks of importance.
The Entrepreneurial Revolution:
A Global Phenomenon
• Entrepreneurship is the symbol of business

tenacity and achievement.
• Entrepreneurs were the pioneers of today’s
business successes.
• Two perspectives on entrepreneurship:
 Statistical: numbers that emphasize the importance
of entrepreneurs to the economy.
 Academic: trends in entrepreneurial research and
education.
Phases of Economic Development
The The The

factor-driven efficiency- innovation-
phase driven phase driven phase
Entrepreneurial Ventures in the United States
• Reasons for the exceptional entrepreneurial
activity in the U.S. include:
 A national culture that supports risk taking and
seeking opportunities.
 Americans’ alertness to unexploited economic
opportunity and a low fear of failure.
 U.S. leadership in entrepreneurship education at
both the undergraduate and graduate level.
 A high percentage of individuals with professional,
technological or business degrees who are likely to
become entrepreneurs.
The Impact of Gazelles -> David Birch
• A “Gazelle”
 A business establishment with at least 20% sales
growth in each year for five years, starting with a
base of at least $100,000 in annual sales.
• Gazelles as leaders in innovation:
 Are responsible for 55% of innovations in 362
different industries and 95% of radical innovations.
 Produce twice as many product innovations per
employee as do larger firms.
 Obtain more patents per sales dollar than do
larger firms.
Gazelles And Survival
• How many gazelles survive?
 The simple answer is “none.”
Sooner or later, all companies wither and die.
• The Common Myth of Failure:

 85% of all firms fail in the first year—in actuality, about
half of all start-ups last between 5 and 7 years.
21st Century Trends in Entrepreneurship Research
Venture
Financing
Corporate Social
Entrepreneurship Entrepreneurship
Trends in Women
Entrepreneurial
Entrepreneurship and Minority
Cognition
Research Entrepreneurs
Global
Entrepreneurial
Entrepreneurial
Education
Movement
Family
Businesses
• Major Research Themes:

1. Venture Financing: venture capital and angel capital financing
and other financing techniques strengthened in the 1990s.
2. Corporate Entrepreneurship and the need for entrepreneurial
cultures has drawn increased attention.
3. Social Entrepreneurship has unprecedented strength within
the new generation of entrepreneurs.
4. Entrepreneurial Cognition is providing new insights into the
psychological aspects of the entrepreneurial process.
5. Women and Minority Entrepreneurs appear to face obstacles
and difficulties different from those that other entrepreneurs face.
6. The Global Entrepreneurial Movement is increasing.
(cont’d)
• Major Research Themes (cont’d):

7. Family Businesses have become a stronger focus of research.
8. Entrepreneurial Education has become one of the hottest topics
in business and engineering schools throughout the world.
T.I.P.’s very own Technopreneurship efforts
Part I
in the 21st Century
Chapter 2
The Entrepreneurial
Mind-Set in
Individuals:
Cognition and Ethics

• Entrepreneurial Mind-Set
 Describes the most common characteristics
associated with successful entrepreneurs as well as
the elements associated with the “dark side” of
entrepreneurship.
• Who Are Entrepreneurs?
 Independent individuals, intensely committed and
determined to persevere, who work very hard.
 They are confident optimists who strive for integrity.
 They burn with the competitive desire to excel and use
failure as a learning tool.
Entrepreneurial Cognition
Social Cognition Entrepreneurial

Cognition
Theory Cognition
The mental functions, Posits that knowledge The knowledge

processes (thoughts), structures (mental structures that people
and states of intelligent models of cognitions) can use to make
humans—attention, be ordered to optimize assessments, judgments,
remembering, producing personal effectiveness or decisions involving
and understanding within given situations. opportunity evaluation,
language, solving venture creation, and
problems, and making growth.
decisions.
Metacognitive Perspective
• Cognitive Adaptability
 The ability to be dynamic, flexible, and self-regulating
in one’s cognitions given dynamic and uncertain task
environments.
• Metacognitive Model
 Describes the higher-order cognitive process that
results in the entrepreneur framing a task effectually,
and thus why and how a particular strategy was
included in a set of alternative responses to the
decision task (metacognition).
Characteristics of the Entrepreneurial Mind-Set
• Determination and • Calculated risk taking
perseverance • High energy level
• Drive to achieve • Creativity and
• Opportunity orientation innovativeness
• Initiative and responsibility • Vision
• Persistent problem solving • Passion
• Seeking feedback • Independence
• Internal locus of control • Team building
• Tolerance for ambiguity
Dealing with Failure:
The Grief Recovery Process
• Loss • Restoration
Orientation Orientation
 Involves focusing on  Involves both distracting
the particular loss to oneself from thinking
construct an account about the failure event
that explains why the and being proactive
loss occurred. towards secondary
causes of stress.
The Dark Side of Entrepreneurship
• The Entrepreneur’s Confrontation with Risk
 Financial risk versus profit (return) motive varies in
entrepreneurs’ desire for wealth.
 Career risk—loss of employment security
 Family and social risk—competing commitments of
work and family
 Psychic risk—psychological impact of failure on the
well-being of entrepreneurs
2.1 Typology of Entrepreneurial Styles
Source: Thomas Monroy and Robert Folger, “A Typology of Entrepreneurial Styles: Beyond
Economic Rationality,” Journal of Private Enterprise 9, no. 2 (1993): 71.
Entrepreneurs: Type A Personalities
(impatient, demanding overstrung)
• Chronic and severe sense of time urgency.
• Constant involvement in multiple projects subject
to deadlines.
• Neglect of all aspects of life except work.
• A tendency to take on excessive responsibility,
combined with the feeling that “Only I am capable
of taking care of this matter.”
• Explosiveness of speech and a tendency to
speak faster than most people.
Stress and the Entrepreneur
• Entrepreneurial Stress
 The extent to which entrepreneurs’ work demands
and expectations exceed their abilities to perform as
venture initiators, they are likely to experience stress.
• Sources of Entrepreneurial Stress

 Loneliness
 Immersion in business
 People problems
 Need to achieve
(David P. Boyd and David E. Gumper)
Dealing with Stress
Networking
Exercising Getting away

rigorously from it all
Communicating
Delegating
with employees
Finding satisfaction
outside the company
The Entrepreneurial Ego
• Self-Destructive Characteristics
 Overbearing need for control
 Sense of distrust
 Overriding desire for success
 Unrealistic externalized optimism
Entrepreneurial Ethics
• Ethics (ethos – mode of conduct)
 Provides the basic rules or parameters for conducting
any activity in an “acceptable” manner.
 Represents a set of principles prescribing a behavioral
code of what is good and right or bad and wrong
 Defines “situational” moral duty and obligations.
• Sources of Ethical Dilemmas
 Pressure from inside and outside interests
 Changes in societal values, mores, and norms
“deciding what is good or right in a dynamic environment
in necessarily situational”
Entrepreneurial Ethics (cont’d)
• Ethical rationalizations used to justify
questionable conduct involve believing that the
activity:
 Is not “really” illegal or immoral.
 Is in the individual’s or the firm’s best interest.
 Will never be found out.
 Helps the firm so the firm will condone it.
Think of an unethical practice which became acceptable
in the modern society?
Table
2.2 Types of Morally Questionable Acts
Type Direct Effect Examples

Nonrole Against the firm Expense account cheating
Embezzlement
Stealing supplies
Role failure Against the firm Superficial performance appraisal

Not confronting expense account cheating
Palming off a poor performer with inflated praise
Role distortion For the firm Bribery

Price fixing
Manipulating suppliers
Role assertion For the firm Investing in unethically governed countries

Using nuclear technology for energy generation
Not withdrawing product line in face of initial
allegations of inadequate safety
Source: James A. Waters and Frederick Bird, “Attending to Ethics in Management,” Journal of Business Ethics 5 (1989): 494.
2.3 Overlap Between Moral Standards and Legal Requirements
Ethical
Dilemmas
Think of a legal requirement that is not necessarily morally acceptable
Reasons for Unethical Behaviors Occur
Greed
A reliance on other social Distinctions between

institutions to convey and activities at work and
reinforce ethics activities at home
Survival Lack of a foundation

(bottom-line thinking) in ethics
Entrepreneurial Ethics (cont’d)
• Online Ethical Dilemmas in E-Commerce
 Continuing to obtain consumer trust.
 Protecting their business’s online reputation.
 Avoiding tactics that betray trust.
 Continuing to exhibit strong ethical responsibility.
 Establishing an ethical strategy.
Establishing a Strategy for an Ethical Venture
• Ethical Code of Conduct
 Is a statement of ethical practices or guidelines to
which an enterprise adheres.
 “Always Do the Right Thing”
Part I
in the 21st Century
Chapter 3
The Entrepreneurial
Mind-Set in
Organizations:
Corporate
Entrepreneurship

Learning Objectives (cont’d)
7. To examine the methods of developing managers
for corporate entrepreneurship
8. To illustrate the interactive process of corporate
entrepreneurship
The Entrepreneurial Mindset in Organizations
• Response to rapid, discontinuous, and significant
changes in companies external and internal
environments in a global economy:
 Restructure of operations in fundamental and meaningful
ways.
 Introduction of corporate entrepreneurship or
intrapreneurship – dynamic, flexible entities prepared to
take advantage of new business opportunities when they
arise
 Continuous innovation which allows for pathways to
accelerate their pace and cope with competition in the
world markets.
Corporate Innovation Philosophy
• Important practices for establishing
an innovation-driven organization:
1. Set explicit innovation goals.
2. Create a system of feedback and
positive reinforcement.
3. Emphasize individual responsibility.
4. Provide rewards based on results.
5. Do not punish failures.
3.1 Rules for an Innovative Environment
1. Encourage action.
2. Use informal meetings whenever possible.
3. Tolerate failure, and use it as a learning experience.
4. Persist in getting an idea to market.
5. Reward innovation for innovation’s sake.
6. Plan the physical layout of the enterprise to encourage
informal communication.
7. Expect clever bootlegging of ideas—secretly working on
new ideas on company time as well as personal time.
8. Put people on small teams for future-oriented projects.
9. Encourage personnel to circumvent rigid procedures and
bureaucratic red tape.
10. Reward and promote innovative personnel.
Source: Reprinted by permission of the publisher from “Corporate Venturing Obstacles: Sources and Solutions,” by Hollister B. Sykes
and Zenas Block, Journal of Business Venturing (winter 1989): 161. Copyright © 1989 by Elsevier Science Publishing Co., Inc.
Defining the Concept of Corporate
Entrepreneurship and Innovation
• Corporate Entrepreneurship
 A process whereby an individual or a group of
individuals, in association with an existing
organization, creates a new organization or instigates
renewal or innovation within the organization.
• Corporate Entrepreneurship Strategy
 A vision-directed, organization-wide reliance on
entrepreneurial behavior that purposefully and
continuously rejuvenates the organization and shapes
the scope of its operations through the recognition
and exploitation of entrepreneurial opportunity.
3.1 Defining Corporate Entrepreneurship
Adding new
Large scale or
business via equity
sequential
investments
innovations
Source: Michael H. Morris, Donald F. Kuratko, and Jeffrey G. Covin, Corporate Entrepreneurship &
Innovation (Mason, OH, Thomson), 2008, p. 81.
Successful Innovative Companies
• Factors in large corporations that are successful
innovators:
 Atmosphere and vision
 Orientation to the market
 Small, flat organizations
 Multiple approaches
 Interactive learning
 Skunk Works (small groups)
Conceptualizing Corporate
Entrepreneurship Strategy
• Corporate Entrepreneurship Strategy
 A vision-directed, organization-wide reliance on
entrepreneurial behavior that purposefully and
continuously rejuvenates the organization and shapes
the scope of its operations through the recognition
and exploitation of entrepreneurial opportunity.
 It requires the creation of congruence between the
entrepreneurial vision of the organization’s leaders
and the entrepreneurial actions of those throughout
the organization.
Modeling the Corporate Entrepreneurship
Strategy Process
• Corporate entrepreneurship strategy is

manifested through the presence of three
elements:
 An entrepreneurial strategic vision
 A pro-entrepreneurship organizational architecture
 Entrepreneurial processes and behavior as
exhibited throughout the organization
Conceptualizing a Corporate
Entrepreneurship Strategy (cont’d)
• Critical steps of a corporate entrepreneurial
strategy:
1. Developing the vision
2. Encouraging innovation
3. Structuring for an intrapreneurial climate
4. Developing individual managers for corporate
entrepreneurship
5. Developing venture teams.
Figure
3.3 Shared Vision
Source: Jon Arild Johannessen, “A Systematic Approach to the Problem of Rooting a Vision in the Basic Components of an Organization,” in
Entrepreneurship, Innovation, and Change 3, no. 1 (March 1994): 47. Reprinted with permission from Plenum Publishing Corporation, New
York.
Types of Innovation
• Radical Innovation
 The launching of inaugural breakthroughs.
 These innovations take experimentation and
determined vision, which are not necessarily managed
but must be recognized and nurtured.
 Mobile computing
 Cloud storage
 Green technologies
Types of Innovation
• Incremental Innovation
 The systematic evolution of a product or service into
newer or larger markets.
 Many times the incremental innovation will take over
after a radical innovation introduces a breakthrough.
3M’s Innovation Rules
• Don’t kill a project
• Tolerate failure
• Keep divisions small
• Motivate the champions
• Stay close to the customer
• Share the wealth
Structuring the Work Environment
• Reestablishing the drive to innovate:

 Invest heavily in entrepreneurial activities that allow
new ideas to flourish in an innovative environment.
 Provide nurturing and information-sharing activities.
 Employee perception of an innovative environment is
critical.
• Corporate Venturing
 Institutionalizing the process of embracing the goal of
growth through development of innovative products,
processes, and technologies with an emphasis on
long-term prosperity.
Developing Individual Managers
for Corporate Entrepreneurship
• Corporate Innovation Training Program 6 modules:

1. The Entrepreneurial Experience
2. Innovative Thinking
3. Idea Acceleration Process
4. Barriers and Facilitators to Innovative Thinking
5. Sustaining Innovation Teams (I-Teams)
6. The Innovation Action Plan
Developing Innovative (I) Teams
• Innovative (I) Team
 A semi-autonomous self-directing, self-managing,
high-performing group of two or more people who
formally create and share the ownership of a new
organization.
 The leader is called a “innovation champion” or a
“corporate entrepreneur.”
• Collective Entrepreneurship
 Individual skills are integrated into a group; this
collective capacity to innovate becomes something
greater than the sum of its parts.
Part I
in the 21st Century
Chapter 4
Social Entrepreneurship
and the Global
Environment for
Entrepreneurship

The Social Entrepreneurship Movement
• Social Entrepreneurship
 Entrepreneurship that is a form that exhibits
characteristics of non-profits, governments, and
businesses.
 Combination of private-sector focus on innovation,
risk-taking, and large-scale transformation with social
problem solving.
• The Social Entrepreneurship Process
 Recognition of a perceived social opportunity
translated into an enterprise concept.
 Resources are acquired to execute the enterprise’s
goals.
Defining the Social Entrepreneur
• Social Entrepreneurs
 A person or small group of individuals who founds
and/or leads an organization or initiative engaged in
social entrepreneurship.
 Also referred to as “public entrepreneurs,” “civic
entrepreneurs,” or “social innovators.”
 Creative thinkers continuously striving for innovation
in technologies, supply sources, distribution outlets, or
methods of production.
 Change agents who create large-scale change using
pattern-breaking ideas to address the root causes of
social problems.
Defining the Social Enterprise
• Driven by social goals
 Challenges are presented regarding the boundaries of
what is and what isn’t a social enterprise.
 Social causes can be based on personal goals.
 General agreement that there is the desire to benefit
society in some way.
 Arguments can begin over the location of the social
goals and with the purposes of the social goals.
Social Enterprise and Sustainability
• Sustainable Entrepreneurship
 Focus on the preservation of nature, life support, and
community.
 Pursuing opportunities to bring into existence future
products, processes, and services for gain, including
economic and noneconomic gains to individuals, the
economy, and society.
Table
4.1 Examples of Social Enterprise Obligations
Environment Pollution control

Restoration or protection of environment
Conservation of natural resources
Recycling efforts
Energy Conservation of energy in production and marketing operations

Efforts to increase the energy efficiency of products
Other energy-saving programs (e.g., company-sponsored car pools)
Fair Business Practices Employment and advancement of women and minorities

Employment and advancement of disadvantaged individuals (disabled, Vietnam veterans,
ex-offenders, former drug addicts, mentally retarded, and hardcore unemployed)
Support for minority-owned businesses
Human Resources Promotion of employee health and safety

Employee training and development
Remedial education programs for disadvantaged employees; alcohol and drug counseling programs
Career counseling
Child day-care facilities for working parents
Employee physical fitness and stress management programs
Community Involvement Donations of cash, products, services, or employee time

Sponsorship of public health projects
Support of education and the arts
Support of community recreation programs
Cooperation in community projects (recycling centers, disaster assistance, and urban renewal)
Products Enhancement of product safety

Sponsorship of product safety education programs
Reduction of polluting potential of products
Improvement in nutritional value of products
Improvement in packaging and labeling
Source: Richard M. Hodgetts and Donald F. Kuratko, Management, 3rd ed. (San Diego, CA: Harcourt Brace Jovanovich, 1991), 670
Forms of Sustainable Entrepreneurship
Social Corporate Social

Ecopreneurship
Entrepreneurship Responsibility
Environmental Activities and processes Actions that appear to

entrepreneurship with undertaken to discover, further some social good,
entrepreneurial actions define, and exploit beyond the interests of
contributing to preserving opportunities in order to the firm and that which is
the natural environment, enhance social wealth by required by law and often
including the Earth, creating new ventures or denotes societal
biodiversity, and managing existing engagement of
ecosystems. organizations in an organizations
innovative manner
Ecopreneurship
• Ecovision
 A leadership style that encourages open and flexible
structures that encompass the employees, the
organization, and the environment, with attention to
evolving social demands.
• Environmental Movement
 Initiated primarily by values rather than by design.
 Developed by a plan to create sustainable future.
Ecopreneurship (cont’d)
• Key Steps in an Environmental Strategy
1. Eliminate the concept of waste.
2. Restore accountability.
3. Make prices reflect costs.
4. Promote diversity.
5. Make conservation profitable.
6. Insist on accountability of nations.
Shared Value and the Triple Bottom Line
• Shared Value
 An approach to creating economic value that also
creates value for society by addressing its needs and
challenges.
 Transforms business thinking by addressing issues
through innovation and methods.
• Triple Bottom Line (TBL)
 An accounting framework that goes beyond the
traditional measures of profit, return on investment,
and shareholder value to include environmental and
social dimensions.
Triple Bottom Line Measures
Economic Environmental Social

Performance Performance Performance
• Personal income • Hazardous chemical • Unemployment rate

• Cost of underemployment concentrations • Median household income
• Establishment sizes • Selected priority pollutants • Relative poverty
• Job growth • Electricity consumption • Percentage of population
• Employment distribution by • Fossil fuel consumption with a post-secondary
sector • Solid waste management degree or certificate
• Percentage of firms in • Hazardous waste • Average commute time

each sector management • Violent crimes per capita
• Revenue by sector • Change in land use/land • Health-adjusted life
contributing to gross state cover expectancy
product.
Part II
Initiating Entrepreneurial
Ventures
Chapter 5
Innovation:
The Creative
Pursuit of Ideas

Opportunity Identification:
The Search for New Ideas
• Opportunity identification is central
to the domain of entrepreneurship and revolves
around the answers to the following:
 Why?
 When?
 How?
• The study of the creative pursuit of new ideas

and the innovation process.
The Search for New (cont’d)
• Sources of Innovative Ideas
 External and internal environments alert
entrepreneurs to opportunities.
 Trends signal shifts in current paradigm (or thinking)
of major population.
 Valuable insights constitute source of potential
entrepreneurial ideas.
Trends
Societal Technology Economic Government

Trends Trends Trends Trends
Higher
Mobile (cell
Aging disposable
phone) Increased
demographics, incomes, dual
technology, regulations,
health and wage-earner
e-commerce, petroleum
fitness growth, families,
Internet prices, terrorism
senior living performance
advances
pressures
Table
5.1 Sources of Innovative Ideas
Source Examples
Unexpected occurrences Unexpected success: Apple Computer (microcomputers)
Unexpected tragedy: 9/11 terrorist attack
Incongruities Overnight package delivery
Process needs Sugar-free products

Caffeine-free coffee
Microwave ovens
Industry and market changes Health care industry: changing to home health care
Demographic changes Retirement communities for older people
Perceptual changes Exercise (aerobics) and the growing concern for fitness
Knowledge-based concepts Mobile (cell phone) technology; pharmaceutical industry;

robotics
The Search for New Ideas (cont’d)
• Entrepreneurs use their existing knowledge
base acquired through work, experience,
and education, to hone ideas into actual
opportunities.
• Entrepreneurs must be able to learn from
their experiences as well.
The Knowledge and Learning Process
Personal work
experience,
and education
Specific General
interest industry
knowledge knowledge
Distilling Ideas
into
Opportunities
Prior customer Prior market

understanding knowledge
Entrepreneurial Imagination and Creativity
• Creative thinking is blended with imagination in a
logical process.
• Develop an ability to see, recognize, and create
opportunity where others find only problems.
Table
5.2 Two Approaches to Creative Problem Solving
Adaptor Innovator
Employs a disciplined, precise, Approaches tasks from unusual angles
methodical approach
Is concerned with solving, rather Discovers problems and avenues of
than finding, problems solutions
Attempts to refine current practices Questions basic assumptions related to

current practices
Tends to be means oriented Has little regard for means; is more

interested in ends
Is capable of extended detail work Has little tolerance for routine work
Is sensitive to group cohesion and Has little or no need for consensus;
cooperation often is insensitive to others
Source: Michael Kirton, “Adaptors and Innovators: A Description and Measure,” Journal of Applied
Psychology 61, no. 5 (October 1976): 623. Copyright © 1976 by The American Psychological Association.
The Nature of the Creative Process
• Creativity is a process that can be developed and
improved. Some individuals have a greater
aptitude for creativity than others.
• Typical Creative Process
 Phase 1: Background or knowledge accumulation
 Phase 2: The incubation process
 Phase 3: The idea experience
 Phase 4: Evaluation and implementation
Developing Your Creativity
• Recognizing Relationships
 Looking for different or unorthodox relationships
among the elements and people around you.
• Developing a Functional Perspective
 Viewing things and people in terms of how they can
satisfy his or her needs and help complete a project.
• Using Your Brains
 The right brain helps us understand analogies,
imagine things, and synthesize information.
 The left brain helps us analyze, verbalize, and use
rational approaches to problem solving.
Table
5.4 Processes Associated with the Two Hemispheres of the Brain
Left Hemisphere Right Hemisphere

Verbal Nonverbal
Analytical Synthesizing
Abstract Seeing analogies
Rational Nonrational
Logical Spatial
Linear Intuitive
Imaginative
Sources: Tasneem Sayeed, “Left vs. Right Brain: Which Hemisphere Dominates You?” Hub Pages, http://tasneemsayeed.hubpages.com/hub/Left_Right_Brain
(Accessed February 10, 2012); Kendra Cherry, “Left Brain vs. Right Brain: Understanding the Myth and Reality of Left Brain and Right Brain Dominance,” About.com,
http://psychology.about.com/od/cognitivepsychology/a/left-brain-right-brain.htm (Accessed February 10, 2012).
Impediments to Creativity
• Eliminating Muddling Mind-Sets
 Either/or thinking (concern for certainty)
 Security hunting (concern for risk)
 Stereotyping (abstracting reality)
 Probability thinking (seeking predictable
results)
Table
5.5 Ways to Develop Left- and Right-Hemisphere Skills
Left-Hemisphere Skills Right-Hemisphere Skills
1. Step-by-step planning of your work 1. Using metaphors and analogies to

and life activities describe things and people in your
2. Reading ancient, medieval, and conversations and writing
scholastic philosophy, legal cases, 2. Taking off your watch when you are
and books on logic not working
3. Establishing timetables for all of 3. Suspending your initial judgment of
your activities ideas, new acquaintances, movies,
4. Using and working with a computer TV programs, and so on
program 4. Recording your hunches, feelings,
5. Detailed fantasizing and visualizing and intuitions and calculating their
things and situations in the future accuracy
6. Drawing faces, caricatures, and

landscapes
Arenas of Creativity
Idea
Creativity
Spontaneous Material
Creativity Creativity
Types of
Creativity Organization
Inner Creativity
Creativity
Event Relationship
Creativity Creativity
Innovation and the Entrepreneur
• Innovation:
 Is the process by which entrepreneurs convert
opportunities (ideas) into marketable solutions.
 Is a combination of the vision to create a good idea
and the perseverance and dedication to remain with
the concept through implementation.
 Is a key function in the entrepreneurial process.
 Is the specific function of entrepreneurship.
The Innovation Process
• Most innovations result from a conscious,
purposeful search for new opportunities.
• Uses both the right and left sides of the brain.
• Entrepreneurs look at figures and people.
• Successful innovations are simple and focused
toward a clear and carefully designed application.
• During the process, they create new customers
and markets.
Table
5.6 Innovation in Action
Type Description Examples

Invention Totally new product, service, Wright brothers—airplane
or process Thomas Edison—light bulb
Alexander Graham Bell—telephone
Extension New use or different Ray Kroc—McDonald’s

application of an already Mark Zuckerberg—Facebook
existing product, service, or Barry Sternlicht—Starwood Hotels &
process Resorts
Duplication Creative replication of an Wal-Mart—department stores

existing concept Gateway—personal computers
Pizza Hut—pizza parlor
Synthesis Combination of existing Fred Smith—Fed Ex

concepts and factors into a Howard Schultz—Starbucks
new formulation or use
The Major Misconceptions of Innovation
• Innovation is planned and predictable.
• Technical specifications must be thoroughly
prepared.
• Innovation relies on dreams and blue-sky ideas.
• Big projects will develop better innovations than
smaller ones.
• Technology is the driving force of innovation
success.
Principles of Innovation
• Be action oriented.
• Make the product, process, or service simple and
understandable.
• Make the product, process, or service customer-based.
• Start small.
• Aim high.
• Try/test/revise.
• Learn from failures
• Follow a milestone schedule.
• Reward heroic activity.
• Work, work, work.
Part II
Ventures
Chapter 6
Assessment of
Entrepreneurial
Opportunities

Learning Objectives
1. To explain the challenge of new-venture start-ups
2. To determine common pitfalls in the selection of
new-venture ideas
3. To analyze the traditional venture evaluation process
methods: profile analysis, feasibility criteria approach,
and comprehensive feasibility method
The Challenge of New-Venture Start-Ups
• New Venture Formation
 The number of new-venture start-ups has been
consistently high at reports of more than 400,000
new firms in the United States every year since 2010.
• Ideas for Potential New Businesses
 The U.S. Patent Office currently receives more than
500,000 patent applications per year.
Components of New-Venture Motivation
1. The need for approval
2. The need for independence
3. The need for personal development
4. Welfare (philanthropic) considerations
5. Perception of wealth
6. Tax reduction and indirect benefits
7. Following role models
Reasons for Starting a Venture
Personal The The

Characteristics Environment Venture
Entrepreneurial
Motivations
Pitfalls in Selecting New Ventures
• Lack of objective evaluation
• No real insight into the market
• Inadequate understanding of technical

requirements
• Poor financial understanding
• Lack of venture uniqueness
• Ignorance of legal issues
Phases in New-Venture Start-ups
• Prestart-up Phase
 Begins with an idea for the venture and ends when
the doors are opened for business.
• Start-up Phase
 Commences with the initiation of sales activity and the
delivery of products and services, and ends when the
business is firmly established and beyond short-term
threats to survival.
• Poststart-up Phase
 Lasts until the venture is terminated or the surviving
organizational entity is no longer controlled by an
entrepreneur.
Critical Factors for
New-Venture Development
1. Uniqueness
 Range can be considerable, extending from fairly
routine to highly nonroutine
2. Investment
 Capital investment to start a new venture can vary
from some industries less than $100,000 to other
industries requiring millions of dollars.
3. Growth of Sales
 Lifestyle ventures
 Small profitable ventures
 High-growth ventures
Critical Factors for
New-Venture Development (cont’d)
4. Product Availability
 Availability of a salable good or service at the time
the venture opens its doors.
 Sometimes there is a problem because the product
or service is still in development and needs further
modification or testing. For example, “bugs” in a
software firm.
5. Customer Availability
 A critical consideration is how long it will take to
determine who the customers are, as well as their
buying habits.
Table
6.1 A New-Venture Idea Checklist
Basic Feasibility of the Venture
1. Can the product or service work?
2. Is it legal?
Competitive Advantages of the Venture
1. What specific competitive advantages will the product or service offer?
2. What are the competitive advantages of the companies already in business?
3. How are the competitors likely to respond?
4. How will the initial competitive advantage be maintained?
Buyer Decisions in the Venture

1. Who are the customers likely to be?
2. How much will each customer buy, and how many customers are there?
3. Where are these customers located, and how will they be serviced?
Marketing of the Goods and Services

1. How much will be spent on advertising and selling?
2. What share of market will the company capture? By when?
3. Who will perform the selling functions?
4. How will prices be set? How will they compare with the competition’s prices?
5. How important is location, and how will it be determined?
6. What distribution channels will be used—wholesale, retail, agents, direct mail?
7. What are the sales targets? By when should they be met?
8. Can any orders be obtained before starting the business? How many? For what total amount?
Source: Karl H. Vesper, New Venture Strategies, (Revised Edition), 1st Edition, © 1990. Reprinted by permission of Pearson Education, Inc. Upper Saddle River, NJ.
Table
6.1 A New-Venture Idea Checklist (cont’d)
Production of the Goods and Services
1. Will the company make or buy what it sells? Or will it use a combination of these two strategies?
2. Are sources of supplies available at reasonable prices?
3. How long will delivery take?
4. Have adequate lease arrangements for premises been made?
5. Will the needed equipment be available on time?
6. Do any special problems with plant setup, clearances, or insurance exist? How will they be resolved?
7. How will quality be controlled?
8. How will returns and servicing be handled?
9. How will pilferage, waste, spoilage, and scrap be controlled?
Staffing Decisions in the Venture

1. How will competence in each area of the business be ensured?
2. Who will have to be hired? By when? How will they be found and recruited?
3. Will a banker, lawyer, accountant, or other advisers be needed?
4. How will replacements be obtained if key people leave?
5. Will special benefit plans have to be arranged?
Control of the Venture

1. What records will be needed? When?
2. Will any special controls be required? What are they? Who will be responsible for them?
Table
6.1 A New-Venture Idea Checklist (cont’d)
Financing the Venture
1. How much will be needed for development of the product or service?
2. How much will be needed for setting up operations?
3. How much will be needed for working capital?
4. Where will the money come from? What if more is needed?
5. Which assumptions in the financial forecasts are most uncertain?
6. What will be the return on equity, or sales, and how does it compare with the rest of the industry?
7. When and how will investors get their money back?
8. What will be needed from the bank, and what is the bank’s response?
Why New Ventures Fail
• Product/Market Problems • Managerial Problems
 Poor timing  Concept of a team
 Product design problems approach
 Inappropriate distribution  Human resource problems
strategy
 Unclear business definition
 Overreliance on one
customer
• Financial Difficulties
 Initial undercapitalization
 Assuming debt too early
 Venture capital relationship
problems
Table
6.2 Types and Classes of First-Year Problems
1. Obtaining external financing 6. General management

• Obtaining financing for growth • Lack of management experience
• Other or general financing problems • Only one person/no time
2. Internal financial management • Managing/controlling growth
• Inadequate working capital • Administrative problems
• Cash-flow problems • Other or general management problems
• Other or general financial management problems 7. Human resource management
3. Sales/marketing • Recruitment/selection
• Low sales • Turnover/retention
• Dependence on one or few clients/customers • Satisfaction/morale
• Marketing or distribution channels • Employee development
• Promotion/public relations/advertising • Other or general human resource
• Other or general marketing problems management problems
4. Product development 8. Economic environment
• Developing products/services • Poor economy/recession
• Other or general product development problems • Other or general economic environment
5. Production/operations management problems
• Establishing or maintaining quality control 9. Regulatory environment
• Raw materials/resources/supplies • Insurance
• Other or general production/operations
management problems
Source: David E. Terpstra and Philip D. Olson, “Entrepreneurial Start-up and Growth: A Classification of Problems,” Entrepreneurship Theory and Practice 17, no. 3 (Spring 1993):
19. Reproduced with permission of John Wiley & Sons Ltd.
New Venture Failure Prediction Model
1. Role of profitability and cash flows
2. Role of debt
3. Combination of both
4. Role of initial size
5. Role of velocity of capital
6. Role of control
The Traditional Venture Evaluation Process
• Profile Analysis Approach
 Identifying and investigating the financial, marketing,
organizational, and human resource variables prior to
start-up.
• The Feasibility Criteria Approach
 The use of a criteria selection list to gain insights.
• Comprehensive Feasibility Approach

 Incorporates external factors in addition to those
included in the criteria questions.
Feasibility Criteria Approach
• Assessing the viability of a venture:
 Is it proprietary?
 Are initial production costs realistic?
 Are the initial marketing costs realistic?
 Does the product have potential for very high margins?
 Is the time required to get to market and to reach the break-even
point realistic?
 Is the potential market large?
 Is the product the first of a growing family?
 Does an initial customer exist?
 Are the development costs and calendar times realistic?
 Is this a growing industry?
 Can the product—and the need for it—be understood by the
financial community?
Figure
6.2 Key Areas for Assessing the Feasibility of a New Venture
Marketability
Range of prices for the same,
complementary, and substitute
products; base prices; and
discount structures
Pricing
Customers, customer demand data
patterns in seasonal variations
in demand, and governmental
regulations affecting demand
Market
data
General
economic
Various economic indicators trends
such as new orders, housing
starts, inventories, and
consumer spending
The Contemporary Methodologies
for Venture Evaluation
• Design Methodology
 Universities are now building programs that take a
general approach to design rather than concentrating
it in just technical schools like architecture and
engineering.
 Takes an initial concept idea and develops a proof of
concept that elicits feedback from relevant
stakeholders.
• Design-Centered Entrepreneurship
 Entrepreneurs apply design methods in four action
stages of developing an opportunity.
The Contemporary Methodologies
for Venture Evaluation (cont’d)
• The Lean Start-up Methodology
 Provides a scientific approach to creating early
venture concepts and delivers a desired product to
customers’ hand faster.
 Reduces waste by maximizing the time and effort that
goes into an incorrect hypothesis by putting a lean-
focused process on the development of your product
or service.
 Entrepreneurs must work to gather and incorporate
customer feedback early and often.
The Design Methodology
• A process that shapes and converts ideas into
form, whether that is a plan of action, an
experience, or a physical thing.
• An initial concept taken and developed into a
proof of concept that elicits
 Proof of Concept Feasibility
 Proof of Concept Desirability
 Proof of Concept Visibility
The Design-Centered Entrepreneurship
• Taking action and learning that culminates in a
venture concept for further development.
• Applying a prototyping stage that addresses the
technical issues of the concept, and ensures that
a feasible product or service can be made and
delivered.
• Incorporating microiterations (within each action
stage to improve the outcome) and
macroiterations (moving from one particular
action stage back to a previous stage for further
development).
Key Lean Start-Up Terminology
• Minimum Viable Product (MVP):
 Three A’s of Metrics
• Actionable
• Accessible
• Auditable
 Pivot
 Build-Measure-Learn Feedback Loop
 Validated Learning
Business Model & Idea Canvasses
Licensed under Creative Commons

Attribution – ShareAlike 4.0 International
Business model: Definition
A business model describes

how an idea will create
value.
How do they make money?
Product & service Subscription to a Ad revenue

sales service
How do they make money?
Commission Freemium
Building your business model
You can visualize your business model

using a business model canvas…
Key activities Customer Customer
Key partners What will your relationships segments
business spend the What types of Who are your paying
What external most time doing? interactions will your customers?
partnerships customers expect to
Product development? Do you have any
should you invest
Sales? Other?
Value have with you?
in? non-paying
proposition customers?
Key resources Channels
• Mentors? How large is this
How will customers
• Lawyers? What will it cost for: group?
find out about you?
• Distributors?
• Suppliers? Manufacturing? Do you have
Intellectual property? How will you get
multiple customer
Human resources? products to them?
segments?
Cost structure Revenue streams

• How might you make $ from this?
How much time and money will be required
• What value, other than money, are you
to do this?
hoping to create?
Adapting the business model canvas
The structure of the business model canvas

can be used to develop any idea...
…even if you aren’t planning on turning

that idea into a business.
Adapting the Business Model Canvas
By modifying the language of the business

model canvas, we can transform it into an
“idea canvas.”
Key activities Audience
Key partners YOUR IDEA relationships Audience
What specific tasks
must you do to get What kind of segments
Who can you ask to your idea off the Project idea relationship are you
invest their time ground? trying to build with Who is your idea
and energy to help your audience? for?
you? Lesson idea
Key resources Channels What are the needs
• Teachers? Thesis of this group?
• Peers? What are some
What materials statement
• Parents? different ways of
should you invest in? Why would they
• Subject experts?
presenting your
find your idea
idea?
Hypothesis valuable?
The cost of your idea The value of your idea

• Time investment • Social value
• Which collaborators would be valuable to • Academic value
invest in? • Monetary value
• Material investment
Part II
Ventures
Chapter 7
Pathways to
Entrepreneurial
Ventures

Learning Objectives
1. Identify the entrepreneurs’ three pathways

to new ventures
The Pathways to New Ventures
for Entrepreneurs
Creating the Acquiring an

New Venture Existing Venture
Pathways to New
Ventures
Obtaining a
Franchise
Creating New Ventures
Approaches to
New-New New-Old
Approach Creating a New Approach
Venture
Source: https://munchkie.wordpress.com/2011/12/09/osa-tako-hero-takoyaki-cart-
Source:
ultimate-street-food-for-frozen-vancouver-days/
https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=2ahUKE
wjWx5XB-
7LkAhVTFogKHdnnAIYQjRx6BAgBEAQ&url=https%3A%2F%2Fvulcanpost.com%2F12
2372%2Ftop-10-healthy-food-deliveries-klang-
valley%2F&psig=AOvVaw2zBR1xN5Q30Y8ULNpc8rFT&ust=1567542093549943
ARE YOU IN OR OUT?
Table
7.1 Trends in Creating Business Opportunities
Emerging Opportunities
Green Products Health Care Niche Consumables Home Automation and
Organic foods Healthy food Wine Media Storage
Organic fibers/textiles School and govt.- Chocolate Lighting control
Alternative Energy sponsored programs Burgers Security systems
Solar Exercise Coffee houses Energy management
Biofuel Yoga Exotic salads Comfort management
Fuel cells Niche gyms Entertainment systems
Energy conservation Children Networked kitchen
Nonmedical appliances
Pre-assisted living
Assisted living transition
services
Emerging Internet Opportunities

Mobile Advertising Virtual Economies
Cell phones “Online auctions”
PDAs Educational Tutoring
Concierge Services Human Resources Services
Niche Social Networks “Matchmaking”
Seniors “Virtual HR”
Music fans “Online Staffing”
Groups of local users
Pet owners
Dating groups
Source: adapted from Steve Cooper, Amanda C. Kooser, Kristin Ohlson, Karen E. Spaeder, Nichole L. Torres, and Sara Wilson, “2007 Hot List,” Entrepreneur
(December 2006): 80–93; and “The World’s 50 Most Innovative Companies,” Fast Company, (March, 2015).
Figure
7.1 Sources of New Business Ideas Among Men and Women
Source: William J. Dennis, A Small Business Primer (Washington DC., National Federation of Independent Business, 1993) 27. Reprinted with permission.
Examining the Financial Picture
When Creating New Ventures
• Upside gain and downside loss expectations
 The profits the business can make and the losses it
can suffer.
• How much money will the enterprise take in if all goes well?
• How much will it gross if operations run as expected?
• How much will it lose if operations do not work out well?
• Risk vs. reward analysis

 Points out the importance of getting an adequate
return on the amount of money risked.
Acquisition of an Established Business Venture
Personal
Preferences
Acquiring an
Examination of Established Evaluation of
Opportunities Entrepreneurial the Venture
Venture
Asking Key
Questions
PERSONAL PREFERENCES
Entrepreneur’s background, skills,

interests and experience and location
EXAMINATION OF OPPORTUNITIES
An entrepreneur must examine available
entrepreneurs through the following sources:
TRADE SOURCES –
suppliers, distributors,
manufacturers, trade
associations
EVALUATION OF THE SELECTED VENTURES
Specific factors of the venture
• Business environment
• Profit, sales and operating ratios
• Business assets
ASKING KEY QUESTIONS
• Why is the business being sold?

• What is the current physical condition of
the business?
• What is the condition of the inventory?
• How many of the employees will remain?
• What type of competition the firm face?
• What does the firm financial picture look
like?
Advantages of Acquiring an Ongoing Venture
Less fear about

Reduced time Purchasing at
successful future
and effort a good price
operation
Buying an
Ongoing Venture
Negotiating the Deal
Information
Factors Affecting
Time Pressure
Negotiations
Alternatives
INFORMATION
- The most critical element during
negotiations.
(performance of the company, nature of
its competition, condition of the market)
- The seller should NEVER be relied on as

the sole source of information
TIME
The buyer should have more time than the

seller to be of advantage
Source: https://www.ltrdigitalgroup.com/07/2014/selling-to-the-self-educated- Source: https://goworkfromanywhere.com/can-fiverr-damage-your-seo/seller/

buyer/
PRESSURE
Pressure from partners causes distraction

during negotiation process
Source: https://www.messagingservice.com/resources/pressures-on-small-business-owners/
ALTERNATIVES
The party with many alternatives has a great

deal of interest in prolonging negotiations.
Source: https://www.messagingservice.com/resources/pressures-on-small-business-owners/
Considerations When Buying a Business
• Request that the seller retain a minority interest
in the business or establish the final purchase
price dependent on the performance of the
business over a three-to-five-year span.
• Be wary of any promises made without written
corroboration.
• Spend time reconstructing financial statements to
determine how much cash is actually available.
• Interview the owner, vendors, competitors,
customers, and employees.
Franchising: The Hybrid
• Franchising
 Any arrangement in which the owner of a trademark,
trade name, or copyright has licensed others to use it
in selling goods or services
• Franchisee
 A purchaser of a franchise
• Franchisor
 The seller of the franchise
How Franchising Works
• Franchisee Obligations:
1. Make a financial investment in the operation.
2. Obtain and maintain a standardized inventory
and/or equipment package usually purchased
from the franchisor.
3. Maintain a specified quality of performance.
4. Follow a franchise fee as well as a percentage
of the gross revenues.
5. Engage in a continuing business relationship.
How Franchising Works (cont’d)
• Franchisor Provides:
1. The company name
2. Identifying symbols, logos, designs, and facilities
3. Professional management training for each
independent unit’s staff
4. Sale of merchandise necessary for the unit’s
operation, equipment to run the operation, and the
food or materials needed for the final product
5. Financial assistance, if needed
6. Continuing aid and guidance to ensure that
everything is done in accordance with the contract
Franchising
• Advantages • Disadvantages
 Training and guidance  Franchise fees
 Brand-name appeal  Franchisor control
 A proven track record  Unfulfilled promises
 Financial assistance of franchisor
Table
7.3 Some of the Most Recognized Franchises
• Burger King
• Dairy Queen
• Days Inn
• Denny’s
• Dunkin’ Donuts
• H&R Block (Tax Preparation)
• McDonald’s
• Meineke Car Care Centers
• Papa John’s Pizza
• 7-Eleven
• Snap-on Tools
• Sports Clips (Hair Salons)
• Subway
• UPS Store (Mail Boxes Etc.)
Franchise Law
• Franchise Disclosure Document (FDD)
 Divided into 23 categories that provide different
segments of information for prospective franchisees
 Developed to provide guidance in complying with the
Franchise Disclosure Rule that requires franchisors
to make full presale
disclosure about their franchises
Table
7.4 The Cost of Franchising
1. The basic franchising fee

2. Insurance
3. Opening product inventory
4. Remodeling and leasehold improvements
5. Utility charges
6. Payroll
7. Debt service
8. Bookkeeping and accounting fees
9. Legal and professional fees
10. State and local licenses, permits, and certifications
Source: Donald F. Kuratko, “Achieving the American Dream as a Franchise,” Small Business Network 3 (July 1987): 2 (updated by author April 2015) .
Evaluating Franchising Opportunities
The Franchise
Opportunity Decision
Learning of
Investigating the Seeking
Franchising
Franchisor Professional Help
Opportunities
Part II
Ventures
Chapter 8
Sources of Capital
for Entrepreneurial
Ventures

Learning Objectives
1. Identify the different sources of capital for ventures
2. Determine the contents of each of the 9 blocks for
business model
Debt Versus Equity
• Debt Financing
 Secured financing of a new venture that involves a
payback of the funds plus a fee (interest for the use of
the money)
• Equity Financing
 Involves the sale (exchange) of some of the
ownership interest in the venture in return for an
unsecured investment in the firm
Debt Financing
• Commercial Banks
 Make 1–5 year intermediate-term loans secured by
collateral (receivables, inventories, or other assets)
 Questions in securing a loan:
1. What do you plan to do with the money?
2. How much do you need?
3. When do you need it?
4. How long will you need it?
5. How will you repay the loan?
Commercial Banks
 No relinquishment of  Regular (monthly)
ownership is required. interest payments are
 More borrowing allows required.
for potentially greater  Cash-flow problems
return on equity. can intensify because
 Low interest rates of payback
reduce the opportunity responsibilities.
cost of borrowing.  Heavy use of debt can
inhibit growth and
development.
Peer-to-Peer Lending (P2P)
• The practice of lending money to unrelated
individuals, or “peers,” without going through a
bank or traditional financial institution.
 Are often Internet-based sites that pool money from
investors willing to lend capital at agreed-upon rates.
 Fees are applied for brokering and servicing loans.
• Possible dangers
 Low funding success rate
 Business plan disclosure
 No ongoing counseling relationship
 Potential tax liability
 Uncertain regulatory environment
Other Debt Financing Sources
• Trade Credit
 Credit given by suppliers who sell goods on account
• Accounts Receivable Financing

 Short-term financing that involves either the pledge of
receivables as collateral for a loan or the sale of
receivables at a discounted value (factoring)
• Factoring
 The sale of accounts receivable at discounted values
• Finance Companies
 Asset-based lenders that lend money against assets
such as receivables, inventory, and equipment
Table
8.1 Common Debt Sources
Business Type Financed Financing Term

Start-Up Existing Short Intermediate Long
Source Firm Firm Term Term Term
Trade credit Yes Yes Yes No No

Commercial Sometimes, but Yes Frequently Sometimes Seldom
banks only if strong
capital or
collateral exists
Peer-to-peer (P2P) Seldom Yes Most frequent Yes Seldom
Factors Seldom Yes Most frequent Seldom No
Leasing Seldom Yes No Most frequent Occasionally
companies
Mutual savings Seldom Real estate No No Real estate
banks and ventures only ventures only
savings-and-loan
associations
Insurance Rarely Yes No No Yes
companies
Equity Financing
• Money invested in the venture with no legal
obligation for entrepreneurs to repay the principal
amount or pay interest on it
• Requires sharing the ownership and profits with
the funding source
• Much safer option than for new ventures than
debt financing
• Owner must be willing to give up part of the
ownership in return for funding
Equity Financing (cont’d)
• Funding sources: public offering and private
placement
• Gives investors a share of the ownership:
• Loan with warrants provide the investor with the right to buy
stock at a fixed price at some future date.
• Convertible debentures are unsecured loans that can be
converted into stock.
• Preferred stock is equity that gives investors a preferred
place among the creditors in the event the venture is
dissolved.
• Common stock is the most basic form of ownership and is
often are sold through public or private offerings.
Public Offering
• “Going public” refers to a corporation’s raising
capital through the sale of its securities on the
stock markets.
• Initial Public Offerings (IPOs): new issues of
common stock
 Size of capital amount  Costs
 Liquidity  Disclosure
 Value  Requirements
 Image  Shareholder pressure
Private Placements
• Regulation D
 Securities and Exchange Commission (SEC)
regulations for reports and statements required when
selling stock to private parties—friends, employees,
customers, relatives, and professionals
 Defines separate exemptions, which are based on the
amount of money being raised:
• Rule 504: placements up to $1 million
• Rule 505: placements of up to $5 million
• Rule 506: placements in excess of $5 million
Private Placements (cont’d)
• Accredited Purchaser
 Regulation D uses the term “accredited purchaser.”
Included in this category are the following:
• Institutional investors such as banks, insurance companies,
venture capital firms
• Any person who buys at least $150,000 of the offered security
and whose net worth, including that of his or her spouse, is at
least 5 times the purchase price
• Any person who, together with his or her spouse, has a net
worth in excess of $1 million at the time of purchase
“Sophisticated” Investors
• Wealthy individuals who invest regularly in new
and early- and late-stage ventures
• Knowledgeable about the technical and
commercial opportunities and risks of the
business in which they invest
Crowdfunding
• Seeks funding for a venture by raising monetary
contributions from a large number of people,
usually by the Internet
• Three principal parts:
 The entrepreneur who proposes the idea and/or
venture to be funded
 The individual or groups who support the idea
 A moderating organization (the “platform”) that brings
the parties together to launch the idea
Crowdfunding (cont’d)
• Two distinct forms:
 Rewards crowdfunding—The entrepreneur seeks a
target amount of funding to launch a business concept
without incurring debt or sacrificing equity and in
return for the donation, the entrepreneur provides
some type of gift or incentive.
 Equity crowdfunding—The entrepreneur shares equity
in the venture, usually in its early stages, in exchange
for the money pledged.
Dispelling Venture Capital Myths
• Myth 1: Venture capital firms want to own control of your
company and tell you how to run the business.
• Myth 2: Venture capitalists are satisfied with a
reasonable return on investment.
• Myth 3: Venture capitalists are quick to invest.
• Myth 4: Venture capitalists are interested in backing new

ideas or high-technology inventions—
management is a secondary consideration.
• Myth 5: Venture capitalists need only basic summary
information before they make an investment.
Criteria for Evaluating
New-Venture Proposals (cont’d)
• Major categories of venture capitalist screening

criteria:
 Entrepreneur’s personality
 Entrepreneur’s experience
 Product or service characteristics
 Market characteristics
 Financial considerations
 Nature of the venture team
Venture Capitalist Evaluation Process
• Stage 1: Initial Screening
 This is a quick review of the basic venture to see if it meets the
venture capitalist’s particular interests.
• Stage 2: Evaluation of the Business Plan
 This is where a detailed reading of the plan is done in order to
evaluate the factors mentioned earlier.
• Stage 3: Oral Presentation
 The entrepreneur verbally presents the plan to the venture
capitalist.
• Stage 4: Final Evaluation
 After analyzing the plan and visiting with suppliers, customers,
consultants, and others, the venture capitalist makes a final
decision.
Table
8.6 Angel Investor
An angel investor is a person who

invests in a new or small business
venture, providing capital for start-up or
expansion. Angel investors are typically
individuals who have spare cash
available and are looking for a higher
rate of return than would be given by
more traditional investments.
Source: Jeffrey Sohl, University of New Hampshire’s Center for Venture Research, 2015; and the Halo Report, 2014.
Informal Risk Capital: Angel Financing
• Business Angel Financing
 Wealthy individuals who are looking for investment
opportunities.
• They are referred to as “business angels” or informal
risk capitalists.
• Types of Angel Investors
 Corporate angels
 Entrepreneurial angels
 Enthusiast angles
 Micromanagement angels
 Professional angels
Table
8.7 Pros and Cons of Dealing with Angel Investors
Pros Cons
1. Angels engage in smaller 1. Angels offer no additional
financial deals. investment money.
2. Angels prefer seed stage or 2. Angels cannot offer any national
start-up stage. image.
3. Angels invest in various industry 3. Angels lack important contacts
sectors. for future leverage.
4. Angels are located in local 4. Angels may want some decision
geographic areas. making with the entrepreneur.
5. Angels are genuinely interested 5. Angels are getting more
in the entrepreneur. sophisticated in their investment
decisions.
REVENUE MODELS,
PRICING STRATEGIES, &
PROJECTED FINANCIAL
STATEMENT
Prof. Ma. Elena C. Estebal
Intended Learning Outcomes
◦ At the end of the session, the students are expected to
be able to:
◦ identify the revenue model applicable to their venture
proposals; and
◦ determine the most appropriate pricing strategy for
their products
REVENUE MODELS
Revenue Model
A revenue model is the strategy of

managing a company’s revenue
streams and the resources required
for each revenue stream.
Revenue stream refers to a
company’s source of revenue
How do they
make
money?
How do they
make
money?
Product & service Subscription to a Ad revenue

sales service
Revenue Models
◦ Manufacturing model
The most prominent among Apple’s
revenue models is its hardware
products (iPhones, iPads, MacBooks
and iMacs. It tries to achieve 60% or
greater gross margin over the COGS
(materials and labor) iPhone costs
about $250 to make and retails for
$700 and up.
Revenue Models
◦ OEM Model
Original Equipment Manufacturer
model is when a company supplies
components or parts to another
company for final assembly and sale.
Intel supplies chips to Hewlett Packard
and many others.
Revenue Models
◦ Consumables Model
This is the Gillette razor and blades

model. 3D printing companies sell their
3D printers at a standard of 40 to 50%
margin of the manufacturing cost, but
then sell the printing ink or resin
repeatedly to 3D printing users at a
much higher margin.
Revenue Models
◦ Freemium Model
Often used by mobile apps to buildup

a customer base. Freemium allows
users to use the app for free, with a
certain limited set of features, with
access to premium features only with a
paid subscription.
Revenue Models
◦ Information Services Model
IRI/Nielsen has systems to monitor the
checkout counters of grocery store,
tracking specific product purchases. It
aggregates this information across tens
thousands of stores and then slices and
dices the information into manufacturer
and product SKUs an then sells this
information back to the manufacturers
for sales and trend analyses.
Revenue Models
◦ IoT Monitoring
A hybrid model used by Philips LED
(lighting). It sells outdoor light posts to
cities as a manufacturer and on top of
which it sells specific sensors as add-on
hardware and also subscriptions to data
services which might include data for
traffic monitoring or pollution monitoring.
Revenue Models
◦ Franchise Model
Jollibee designed an entire business
concept -chickenjoy, yumburger,
spaghetti etc. that it sells for a franchise
fee to other individuals who want to start
and operate a fast food. Typically there is
a franchise fee for the initial startup and
then a royalty fee for various products or
services designed and produced by the
franchisor.
PRICING STRATEGIES
Prof. Ma. Elena C. Estebal
Pricing Strategies
The term “pricing strategy” encompasses

all the methods that a business owner
uses to determine how much to charge
for a product or service. In order to put a
great strategy into action, you’ll typically
end up doing some math, performing
market research, or collecting consumer
insights first.
Pricing Strategies
◦ Cost-plus pricing
The practice whereby the company

determines the cost of the product
to the company and then adding a
percentage on top of that price to
determine the selling price to the
customer.
Pricing Strategies
◦ Penetration Pricing
A marketing strategy used by businesses to
attract customers to a new product or service
by offering a lower price during its initial
offering. The lower price helps a new product
or service penetrate the market and attract
customers away from competitors. It is
understood that prices will be raised once the
promotion period is over and market share
objectives are achieved.
Pricing Strategies
◦ Competitive Pricing
This pricing strategy is extremely similar
to penetration pricing in that your
goal is to drive your target audience
away from your competitors and
toward your brand. However, instead
of making price increases later on,
you’ll continue to track what your
competitors are charging and beat
them out.
Pricing Strategies
◦ Value-based Pricing
This takes into account how
beneficial, high-quality, and
important your customers believe
your products or services to be. In
order to set value-based prices, you
must have a deep understanding of
your target audience’s needs, pain
points, and motivations, as well as
your brand’s own reputation.
Pricing in the Social Media Age
◦ Freemium Model ◦ Subscription Model
- offers a basic service for free, - this requires users to pay a
while charging for a premium fee (generally monthly or
service with advanced features yearly) to access a product or
to paying members. service.
◦ Virtual Goods Model

- users pay for virtual goods,
such as upgrades, points, or
gifts, on a website or in a game.
BUSINESS MODEL
Business Model: Definition
A business model describes how an

idea will create value.
Building your Business Model
◦You can visualize your business model

using a business model canvas…
Business Model
1. Customer Segments: Who are the customers? What do they
think? See? Feel? Do?
2. Value Propositions: What’s compelling about the proposition?
Why do customers buy, use?
3. Channels: How are these propositions promoted, sold and
delivered? Why? Is it working?
4. Customer Relationships: How do you interact with the customer
through their ‘journey’?
5. Revenue Streams: How does the business earn revenue from the
value propositions?
6. Key Activities: What uniquely strategic things does the

business do to deliver its proposition?
7. Key Resources: What unique strategic assets must the
business have to compete?
8. Key Partnerships: What can the company not do so it can
focus on its Key Activities?
9. Cost Structure: What are the business’ major cost drivers?
How are they linked to revenue?
Part III
Developing the
Entrepreneurial Plan
Chapter 9
Legal Challenges
for Entrepreneurial
Ventures

Legal Components
• Three groups that can affect entrepreneurial
ventures.
 Those that related to the inception of the venture
 Those that relate to the ongoing venture
 Those that relate to the growth and continuity of the
venture
VIDEO INTRODUCTION
Intellectual Property Protection: Patents
• Patent
 Provides the owner with exclusive rights to hold,
transfer, and license the production and sale of the
product or process as an intellectual property right.
 Design patents last for 14 years; all others last for 20
years.
 Intellectual property rights result of a unique
discovery.
• What items qualify for patent protection?
 Processes, machines, products, plants, compositions
of elements (chemical compounds), and
improvements on already existing items
Securing a Patent: The Application
• Patent Application
 Specification: the text of a patent and may include any
accompanying illustrations
• An introduction explaining why the invention will be useful
• A description of prior art considered similar to the invention
• A summary of the essence of the technology/invention, its
differences from prior art and requisite features
• A description of the invention, including anything remotely
relevant, reference to variations, and number bounds
• Examples and/or experimental results, in full detail
 Claims: a series of short paragraphs, each of which
identifies a particular feature or combination of
features that is protected by the patent
Intellectual Property Protection: Copyrights
• Copyright
 Provides exclusive rights to creative individuals for
the protection of their literary or artistic productions
 Duration: life of the author plus 70 years
• The copyright owner has the rights to:

 Reproduce the work
 Prepare derivative works based on it
 Distribute copies of the work by sale or otherwise
 Perform the work publicly
 Display the work publicly
Understanding Copyright Protection
• Copyright Protection
 The material must be in a tangible form so it can be
communicated or reproduced.
 It also must be the author’s own work and thus the
product of his or her skill or judgment.
 Formal registration of a copyright is with the Copyright
Office of the Library of Congress.
Understanding Copyright Protection (cont’d)
• Fair Use Doctrine
 Reproduction of a copyright work for purposes such
as criticism, comment, news reporting, teaching
(including multiple copies for classroom use),
scholarship, or research is not an infringement of
copyright
• Protected Ideas?
 The Copyright Act specifically excludes copyright
protection for any “idea, procedure, process, system,
method of operation, concept, principle, or discovery,
regardless of the form in which it is described,
explained, illustrated, or embodied.”
Intellectual Property Protection: Trademarks
• Trademark
 A distinctive name, mark, symbol, or motto
identified with a company’s product(s) and
registered at the Patent and Trademark Office
• Advantages of Trademark Registration
 Nationwide constructive notice of the owner’s right
to use the mark
 Bureau of Customs protection against importers
using the mark
 Incontestability of the mark after five years
Trademarks
• Trademark Duration
 Current registrations are good for 10 years with the
possibility for continuous renewal every 10 years.
 A trademark may be invalidated in four specific ways:
• Cancellation proceedings
• Cleaning-out procedure
• Abandonment
• Generic meaning
Trademarks (cont’d)
• Trade Secrets
 Business processes and information that cannot
be patented, copyrighted, or trademarked but
makes an individual company unique and has
value to a competitor could be a trade secret
• Information is considered a trade secret:
 If it is not known by the competition.
 If the business would lose its advantage if the
competition were to obtain it.
 If the owner has taken reasonable steps to protect
the secret from disclosure.
Trademarks (cont’d)
• Examples of Trade Secrets:
 Customer lists
 Strategic plans
 Research and development
 Pricing information
 Marketing techniques
 Production techniques
Primary Legal Forms of Organization
Corporation
Partnership
Sole proprietorship
Table
9.2 Forms of Intellectual Property
Patent Copyright
DEFINITION A grant from the government that An intangible property right granted to authors and
gives an inventor exclusive rights to originators of a literary work or artistic production that
an invention. falls within specified categories.
REQUIREMENTS An invention must be: Literary or artistic works must be:
1. Novel. 1. Original.
2. Not obvious. 2. Fixed in a durable medium that can be perceived,
3. Useful. reproduced, or communicated.
3. Within a copyrightable category.
TYPES OR 1. Utility (general). 1. Literary works (including computer programs).
CATEGORIES 2. Design. 2. Musical works.
3. Plant (flowers, vegetables, and 3. Dramatic works.
so on). 4. Pantomime and choreographic works.
5. Pictorial, graphic, and sculptural works.
6. Films and audiovisual works.
7. Sound recordings.
HOW ACQUIRED By filing a patent application with Automatic (once in tangible form); to recover for
the U.S. Patent and Trademark infringement, the copyright must be registered with the
Office and receiving that office’s U.S. Copyright Office.
approval.
Source: Frank B. Cross and Roger LeRoy Miller, West’s Legal Environment of Business, 4th ed. C 2001 Cengage Learning; see also Roger LeRoy Miller and Frank B.
Cross, The Legal Environment Today: Business in Its Ethical, Regulatory, E-Commerce, and Global Setting, 8th ed. (Mason, OH: South-Western/Cengage, 2016).
Reprinted with permission.
Table
9.2 Forms of Intellectual Property (cont’d)
Trademarks
(Service Marks and Trade Dress) Trade Secrets
DEFINITION Any distinctive word, name, symbol, or device (image Any information (including formulas, patterns,
or appearance), or combination thereof, that an entity programs, devices, techniques, and processes) that
uses to identify and distinguish its goods or services a business possesses and that gives the business
from those of others. an advantage over competitors who do not know
the information or process.
REQUIREMENTS Trademarks, service marks, and trade dresses must Information and processes that have commercial
be sufficiently distinctive (or must have acquired a value, that are not known or easily ascertainable by
secondary meaning) to enable consumers and others the general public or others, and that are
to distinguish manufacturer’s, seller’s, or business reasonably protected from disclosure.
user’s products or services from those of competitors.
TYPES OR 1. Strong, distinctive marks (such as fanciful, 1. Literary works (including computer programs).
CATEGORIES arbitrary, or suggestive marks). 2. Musical works.
2. Marks that have acquired a secondary meaning 3. Dramatic works.
by use. 4. Pantomime and choreographic works.
3. Other types of marks, including certification marks 5. Pictorial, graphic, and sculptural works.
and collective marks. 6. Films and audiovisual works.
4. Trade dress (such as a distinctive decor, menu, 7. Sound recordings.
style, or type of service).
HOW ACQUIRED 1. At common law, ownership is created by use of Through the originality and development of
mark. information and processes that are unique to a
2. Registration (either with the U.S. Patent and business, that are unknown by others, and that
Trademark Office or with the appropriate state would be valuable to competitors if they knew of the
office) gives constructive notice of date of use. information and processes..
Table
Patent Copyright
RIGHTS An inventor has the right to make, use, sell, assign, or The author or originator has the exclusive
license the invention during the duration of the right to reproduce, distribute, display,
patent’s term. The first to invent has patent rights. license, or transfer a copyrighted work.
DURATION 20 years from the date of application; for design 1. For authors: the life of the author, plus 70 years.
patents, 14 years. 2. For publishers: 95 years after the date of
publication or 120 years after creation.
CIVIL REMEDIES Monetary damages, which include reasonable Actual damages, plus profits received by the
FOR royalties and lost profits, plus attorneys’ fees. infringer; or statutory damages of not less than
INFRINGEMENT (Treble damages are available for intentional $500 and not more than $20,000 ($100,000, if
infringement.) infringement is willful); plus costs and attorneys’
fees.
Table
Trademarks
(Service Marks and Trade Dress) Trade Secrets
RIGHTS The owner has the right to use the mark or trade The owner has the right to sole and exclusive use of
dress and to exclude others from using it. The right of the trade secrets and the right to use legal means to
use can be licensed or sold (assigned) to another. protect against misappropriation of the trade secrets
by others. The owner can license or assign a trade
secret.
DURATION Unlimited, as long as it is in use. To continue notice Unlimited, as long as not revealed to others.
by registration, the registration must be renewed by
filing.
CIVIL REMEDIES 1. Injunction prohibiting future use of mark. Monetary damages for misappropriation (the
FOR 2. Actual damages, plus profits received by the Uniform Trade Secrets Act permits punitive
INFRINGEMENT infringer (can be increased to three times the damages up to twice the amount of actual damages
actual damages under the Lanham Act). for willful and malicious misappropriation); plus
3. Impoundment and destruction of infringing costs and attorneys’ fees.
articles.
4. Plus costs and attorneys’ fees.
Sole Proprietorships
• Sole Proprietorship
 A business that is owned and operated by one
person. The enterprise has no existence apart
from its owner.
 To establish a sole proprietorship, a person merely
needs to obtain whatever local and state licenses are
necessary to begin operations.
Sole Proprietorships (cont’d)
Ease of formation Unlimited liability
Sole ownership of profits Lack of continuity
Decision making and Less available capital
control vested in one Relative difficulty
owner obtaining long-term
Flexibility financing
Relative freedom from Relatively limited
governmental control viewpoint and
Freedom from corporate experience
business taxes
Partnerships
• Partnership
 An association of two or more persons acting
as co-owners of a business for profit.
 The Revised Uniform Partnership Act (RUPA) acts as
the guide for legal requirements in forming
partnerships.
• Articles of Partnership
 Clearly outline the financial and managerial
contributions of the partners and carefully delineate
the roles in the partnership relationship.
Articles of Partnership Items
• Duration of agreement
• Character of partners (general or limited, active or silent)
• Division of profits and losses
• Death of a partner (dissolution and windup)
• Release of debts
• Business expenses (method of handling)
• Authority (individual partner’s authority on business conduct)
• Settlement of disputes
• Additions, alterations, or modifications of partnership
Partnerships (cont’d)
 Ease of formation  Unlimited liability of
 Direct rewards at least one partner
 Growth and  Lack of continuity
performance facilitated  Relative difficulty
 Flexibility obtaining large sums
of capital
 Relative freedom from
governmental control  Bound by the acts of
and regulation general partner
 Possible tax advantage  Difficulty of disposing
of partnership interest
Corporations
• Corporation
 “An artificial being, invisible, intangible, and
existing only in contemplation of the law.”
–Supreme Court Justice John Marshall
 As such, a corporation is a separate legal entity
apart from the individuals who own it.
• Forming a Corporation
 Subscriptions for capital stock must be taken
and a tentative organization created.
 Approval (a charter) must be obtained from the
secretary of state in the state in which the
corporation is to be formed.
Corporations (cont’d)
 Limited liability  Activity restrictions
 Transfer of ownership  Lack of representation
 Unlimited life  Regulation
 Relative ease of  Organizing expenses
securing capital in  Double taxation
large amounts
 Increased ability and
expertise
Table
9.3 General Characteristics of Forms of Business
Limited Liability
Sole Limited Liability Limited Limited Limited Liability
Proprietorship Partnership Partnership Partnership Partnership Corporation S Corporation Company
Formation When one By agreement of By agreement of By agreement of By agreement of By agreement of By agreement of By agreement of
person owns a owners or by owners; must owners; must owners; must owners; must owners; must owners; must
business default when two comply with comply with comply with comply with comply with comply with
without or more owners limited liability limited limited liability corporation corporation state; limited liability
forming a conduct business partnership partnership limited statute must elect S company statute
corporation or together without statute statute partnership Corporation
LLC forming a limited statute status under
partnership, an Subchapter S of
LLC or a Internal Revenue
corporation Code
Duration Terminates on Usually Unaffected by Unaffected by Unaffected by Unaffected by Unaffected by Usually

death or unaffected by death or death or death or death or death or unaffected by
withdrawal of death or withdrawal of withdrawal of withdrawal of withdrawal of withdrawal of death or
sole proprietor withdrawal of partner partner, unless partner, unless shareholder shareholder withdrawal of
partner sole general sole general member
partner partner
dissociates dissociates
Management By sole By partners By partners By general By general By board of By board of By managers or

proprietor partners partners directors directors members
Owner Liability Unlimited Unlimited Mostly limited to Unlimited for Limited to capital Limited to capital Limited to capital Limited to capital
capital general partners; contribution contribution contribution contribution
contribution limited to capital
contribution for
limited partners
Transferability None None None None, unless None, unless Freely Freely None, unless
of Owners’ agreed otherwise agreed otherwise transferable, transferable, agreed otherwise
Interest although although
shareholders may shareholders
agree otherwise usually agree
otherwise
Source: Jane P. Mallor, A. James Barnes, Thomas Bowers, and Arlen W. Langvardt, Business Law: The Ethical, Global, and E-Commerce Environment, 16th ed. (New York: McGraw
Hill Irwin, 2016), 995. © The McGraw-Hill Companies, Inc.
Table
9.3 General Characteristics of Forms of Business (cont’d)
Limited Liability
Sole Limited Liability Limited Limited Limited Liability
Proprietorship Partnership Partnership Partnership Partnership Corporation S Corporation Company
Federal Only sole Only partners Usually only Usually only Usually only Corporation Only shareholders Usually only
Income proprietor taxed partners taxed; partners taxed; partners taxed; taxed; taxed members taxed;
Taxation taxed may elect to be may elect to be may elect to be shareholders may elect to be
taxed like a taxed like a taxed like a taxed on taxed like a
corporation corporation corporation dividends (double corporation
tax)
Source: Jane P. Mallor, A. James Barnes, Thomas Bowers, and Arlen W. Langvardt, Business Law: The Ethical, Global, and E-Commerce Environment, 16th ed. (New York:
McGraw Hill Irwin, 2016), 995. © The McGraw-Hill Companies, Inc.
Specific Forms of Partnerships
and Corporations (cont’d)
• Limited Partnerships
 Two or more partners without responsibility for management
and without liability for losses beyond their investment with the
right to share in the profits
• Formed under The Uniform Limited Partnership Act (ULPA)
• Limited Liability Partnership (LLP)

 Allows professionals the tax benefits of a partnership while
avoiding personal liability for the malpractice of other partners
• S Corporation
 Takes its name from Subchapter S of the Internal
Revenue Code.
 Commonly known as a “tax option corporation”—it
is taxed similarly to a partnership.
 Avoids the imposition of income taxes at the
corporate level yet retain the benefits of a
corporate form (especially the limited liability).
• Limited Liability Company (LLC)
 A hybrid form of business enterprise that offers the
limited liability of a corporation but the tax advantages
of a partnership.
 Disadvantage is that LLC statutes differ from state to
state, and thus any firm engaged in multi-state
operations may face difficulties.
• B Corporations
 A new way for businesses to solve critical social and
environmental problems by addressing two critical
problems:
• Corporate laws that make it difficult for businesses to
consider employee, community, and environmental interests
in their decision making
• The lack of transparent standards that can make it difficult to
tell the difference between a socially proactive company and
just good marketing
• L3C
 Low-profit, limited liability company that facilitates
investments in socially beneficial, for-profit ventures
 Designed to attract private investments and
philanthropic capital in ventures designed to provide a
social benefit
 Explicit primary charitable mission and only a
secondary profit concern
 Able to form flexible partnerships where tiered
ownership rights are set to meet the requirements of
each partner
Part III
Developing the
Entrepreneurial Plan
Chapter 10
Marketing Challenges
for Entrepreneurial
Ventures

The New Marketing Concept for Entrepreneurs
• Shift from the 4Ps to the 4Cs:
 From Product……..to Cocreated
 From Promotion…..to Communities
 From Price…………to Customizable
 From Place…………to Choice
• The Era of Generation C (as in Content)

 Connected, creative, collaborative, and contextual.
The customer is central to all effective marketing activity.
Marketing Terms
• Market
 A group of consumers (potential customers) who
have purchasing power and unsatisfied needs.
 A new venture will survive only if a market exists
for its product or service.
• Marketing Research
 The gathering of information about a particular
market, followed by analysis of that information.
Defining the Research Purpose and Objectives
• Where do potential customers go to purchase
the good or service in question?
• Why do they choose to go there?
• What is the size of the market?
How much of it can the business capture?
• How does the business compare with
competitors?
• What impact does the business’s promotion
have on customers?
• What types of products or services are
desired by potential customers?
Gathering Information
• Secondary Data
 Information that has already been compiled.
• Advantage: Less expensive and available
• Disadvantages: outdated, lacks specificity,
questionable validity
• Sources: internal and/or external sources
• Primary Data
 New information that is gathered specifically for the
research at hand.
• Surveys
• Experimentation
Quantitative versus Qualitative
Marketing Research
• Quantitative Research • Qualitative research
 Involves empirical  Requires smaller sample
assessments that work from size as it involves the
numerical measurements and researcher into the process
analytical approaches to and is able to delve deeper
compare the results. into the questions with the
 The researcher is an respondents.
uninvolved observer so that  Relies less on analytical
the results are testing, and the researcher
 Requires larger samples to is engaged in the process,
be able to perform the the results are considered
statistical analyses. “subjective.”
Interpreting and Reporting the Information
• Data organized and interpreted is information.
 Tables, charts, graphs
 Descriptive statistics—mean, mode, median
• Market research subject areas:
 Sales
 Distribution
 Markets
 Advertising
 Products
Inhibitors to Market Research
• Mistaken beliefs that inhibit the use of marketing
research:
 Cost: research is too expensive.
 Complexity: research techniques rely on overly
complex sampling, surveying, and statistical analysis.
 Strategic Decisions: only major strategic decisions
need to be supported through marketing research.
 Irrelevancy: research data will contain either
information that merely supports what is already
known or irrelevant information.
Social Media Marketing
• Social Media Marketing
 The use of social networks, online communities,
blogs, wikis, and other online collaborative media
tools for marketing purposes.
• Effective Social Media Marketing
 Create value with an event, a video, a tweet, or a blog
entry, that attracts attention and becomes viral.
 Enable customers to promote a message themselves
with multiple online social media venues.
 Encourage user participation and dialogue that fully
engages customers with online conversations.
Key Distinctions of Social Media Marketing
• Control Versus Contributions
 Social medial marketing emphasizes
audience contribution and relinquishes
organizational control over large parts of the
content.
• Trust Building
 Firms cannot fully control the content users
create, development of trusting relationships
is required.
• Two-Way Communication
 Social media creates an ongoing interactive
conversation between the firm and the
customer.
Developing a Social Media Marketing Plan
Listen
Monitor Identify
Convert Categorize
Contribute Appraise
Collaborate Implement
Mobile Marketing
• Mobile marketing applications allow the creation
and exchange of user-generated content and a
plethora of marketing opportunities, such as text
messaging, mobile applications, and mobile
advertising via Common mobile computing
devices include cell phones, PDAs, smartphones,
tablet PCs, and netbooks.
Mobile Marketing
Integrate
Mobile Social
Initiate Media Strategy: Involve
The Four I’s
Individualize
Entrepreneurial Tactics in Market Research
Guerrilla
Marketing
Archival Insights in
Research Ordinary Patterns
Blog Technological
Monitoring Tools
Lead User Customer

Research Observation
Focus Web-Based
Groups Surveys
• Guerilla Marketing – collecting market research
information using creative ways
• Insights in Ordinary Patterns – which time and day of
the week customers purchase? How?
• Technological Tools – software to determine how
many attempts to place in carts result to actual
purchase
• Customer Observation –
• Obtrusive – customers are ask to identify their
preferences
• Unobtrusive – counting cars as they pass the street
• Web-Based Survey – Pizzahut
• Focus Group Interviews – gathering of 6-10
customers for in depth discussion
• Lead User Research – finding people who have
needs but no solution have exist (with ideas but not
yet developed)
• Blog Monitoring – simple content analysis on themes
that appears on blog discussions
• Archival Research – search written documents,
magazines, videos, patent records as they can reveal
vital insights to creative researcher
Developing the Marketing Concept
• Marketing Philosophies
 Production-driven philosophy
 Sales-driven philosophy
 Consumer-driven philosophy
• Factors in Choosing a Marketing Philosophy

 Competitive pressure
 Entrepreneur’s background
 Short-term focus
Developing the Marketing Concept (cont’d)
• Market Segmentation
 The process of identifying a specific set
of characteristics that differentiate one
group of consumers from the rest.
 Demographic variables
• Age, marital status, sex, occupation, income,
and location
 Benefit variables
• Convenience, cost, style, trends (depending
on the nature of the particular new venture)
Consumer Behavior
• Consumer Behavior
 The types and patterns of consumer characteristics:
• Personal characteristics
• Psychological characteristics
• Major Consumer Goods Classifications:

1. Convenience goods (want but wont spend time buying)
2. Shopping goods (will examine quality and price)
3. Specialty goods (special effort to find and purchase)
4. Unsought goods (consumers do not currently need or seek)
5. New products (unknown to market due to lack of advertising or it
is a really new product)
Table
10.4 Changing Priorities and Purchases in the Family Life Cycle
Stage Priorities Major Purchases

Fledgling: teens and Self; socializing; Appearance products, clothing, automobiles,
early 20s education recreation, hobbies, travel
Courting: 20s Self and other; pair Furniture and furnishings, entertainment and
bonding; career entertaining, savings
Nest building: 20s Babies and career Home, garden, do-it-yourself and items, baby-care
early 30s products, insurance
Full nest: 30–50s Children and others; Children’s food, clothing, education, transportation,
career; midlife crisis orthodontics; career and life counseling
Empty nest: 50–75 Self and others; Furniture and furnishings, entertainment, travel,
relaxation hobbies, luxury automobiles, boats, investments
Sole survivor: 70–90 Self; health; loneliness Health care services, diet, security and comfort
products, TV and books, long-distance telephone
services
Source: Peter R. Dickson, Marketing Management, 1st ed., © 1994 Cengage Learning; see also William M. Pride and O. C. Ferrell, Marketing 18th ed. (Mason, OH:
Cengage/South-Western, 2016).
Developing a Marketing Plan
A marketing plan is the process of determining a clear,
comprehensive approach to the creation of customers.
• Current Marketing Research—determining who the customers are,
what they want, and how they buy.
• Current Sales Analysis—promoting and distributing products
according to marketing research findings.
• Marketing Information System—collecting, screening, analyzing,
storing, retrieving, and disseminating marketing information on which
to base plans, decisions, and actions.
• Sales Forecasting—coordinating personal judgment with reliable
market information.
• Evaluation—identifying and assessing deviations from marketing
plans.
• Final Considerations for Entrepreneurs—marketing plans must be
based on the venture’s specific goals.
Freemium Model
Affiliate Model Subscription Model
Virtual Goods Model Advertising Model
Table
10.5 Pricing for the Product Life Cycle
Customer demand and sales volume will vary with the development of a product. Thus, pricing for products needs to be adjusted at each stage of
their life cycle. The following outline provides some suggested pricing methods that relate to the different stages in the product life cycle. With this
general outline in mind, potential entrepreneurs can formulate the most appropriate pricing strategy.
Product Life Cycle Stage Pricing Strategy Reasons/Effects
Introductory Stage
Unique product Skimming—deliberately setting a high price to Initial price set high to establish a quality image, to
maximize short-term profits provide capital to offset development costs, and to
allow for future price reductions to handle
competition
Nonunique product Penetration—setting prices at such a low level Allows quick gains in market share by setting a price
that products are sold at a loss below competitors’ prices
Growth Stage Consumer pricing—combining penetration and Depends on the number of potential competitors,
competitive pricing to gain market share; depends size of total market, and distribution of that market
on consumer’s perceived value of product
Maturity Stage Demand-oriented pricing—following a flexible Sales growth declines; customers are very price-
strategy that bases pricing decisions on the level sensitive demand level for the product
of consumer demand
Decline Stage Loss leader pricing—pricing the product below Product possesses little or no attraction to
cost in an attempt to attract customers to other customers; the idea is to have low prices bring
products customers to newer product lines
Source: Adapted from Colleen Green, “Strategic Pricing,” Small Business Reports (August 1989): 27–33; updated for Accuracy February, 2015.
6.1 Understanding the Key Financial Statements
Basic financial statements an entrepreneur needs to be familiar with are; the balance
sheet, the income statement, and the cash-flow statement.
The Balance Sheet Reports a business’s financial position at a specific time.
The balance sheet is divided into two parts:

o The financial resources owned by the firm
o The claims against these resources
The financial resources the firm owns are called assets.

The claims creditors have against the company are called liabilities.

o Short-term liabilities must be paid during the coming 12 months.
o Long-term liabilities are not due and payable within the next 12 months.
The residual interest of the firm’s owners is known as owners’ equity.

UNDERSTANDING THE BALANCE SHEET
The balance sheet has three sections:

o
 assets (Current, Fixed)
 liabilities, and
 owners’ equity.
Current Assets
Cash and other assets expected to be turned into cash, sold, or used up during a
normal operating cycle (cash, accounts receivable, inventory, prepaid expenses)
Fixed Assets
Land, building, equipment, and other assets expected to remain with the firm for an
extended period; they are not totally used up in the production of the firm’s goods and
services.
Current Liabilities
Obligations due and payable during the next year or within the operating cycle
(accounts payable, notes payable, taxes payable, and loans payable).
Long-Term Liabilities
Obligations not due or payable for at least one year or not within the current operating
cycle (bank loans).
Contributed Capital
When a corporation is owned by individuals who have purchased stock in the business;
various kinds of stock can be sold by a corporation, the most typical being common
stock and preferred stock.
Retained Earnings
The accumulated net income over the life of the corporation to date; every year this
amount increases by the profit the firm makes and keeps within the company.
WHY THE BALANCE SHEET ALWAYS BALANCES
The balance sheet always balances because if something happens on one side of the
balance sheet, it is offset by something on the other side.
A Credit Transaction
When a company orders materials from a supplier, their inventory goes up
and accounts payable also goes up by the amount the supplier charged. The increase
in current assets is offset by an increase in current liabilities.
When the bill is paid by the company by issuing a check, cash declines by the billed
amount. At the same time, accounts payable decreases by this same amount. Again,
these are offsetting transactions, and the balance sheet remains in balance.
A Bank Loan
A company may have an outstanding bank loan of $200,000 in 2018. If the company
increases this loan by $110,000 in 2016, cash goes up by $110,000, and bank loan
increases by the same amount. In addition, if the firm uses this $110,000 to buy new
machinery, cash decreases by $110,000 and equipment increases by the same
amount.
A Stock Sale
A company issues and sells shares of common stock. The balance sheet action shows
that common stock increases as well as cash.
The Income Statement
Shows the change that has occurred in a firm’s position as a result of its operations over
a specific period.
Revenue: obtained every time a business sells a product or performs a service
Expenses: major expenses, inclusive of costs of goods sold
Net income: excess of revenue over expenses
UNDERSTANDING THE INCOME STATEMENT
The typical income statement has five major sections: (1) sales revenue, (2) cost of
goods sold, (3) operating expenses, (4) financial expense, and (5) income taxes
estimated.
Revenue—sales revenue is often referred to as gross revenue.
Cost of Goods Sold—the cost of goods for a given period equals the beginning
inventory plus any purchases the firm makes minus the inventory on hand at the end of
the period.
Operating Expenses—major expenses, exclusive of costs of goods sold, are classified
as operating expenses. Expenses often are divided into two broad subclassifications:
selling expenses and administrative expenses.
Financial Expense—financial expense is the interest expense on long-term loans.
Estimated Income Taxes— corporations pay estimated income taxes.
The Cash-Flow Statement
The cash-flow statement shows the effects of a company’s operating, investing,
and financing activities on its cash balance.
Key questions answered by the cash-flow statement:

o How much cash did the firm generate from operations? Operating cash flows:
cash generated from or used in the course of business operations of the firm.
o How did the firm finance fixed capital expenditures? Financing activities: cash
flow effect of financing decisions of the firm (sale of stocks and bonds,
repurchase of securities, and payment of dividends)
o How much new debt did the firm add? Investing activities: cash flow effects from
long-term investing activities, such as purchase or sale of plant and equipment
6.2 Preparing Financial Budgets

Preparing Financial Budgets
The operating budget is a statement of estimated income and expenses during a
specified period of time. Another common type of budget is the cash-flow budget, which
is a statement of estimated cash receipts and expenditures during a specified period of
time.
The Operating Budget
The first step in an operating budget is the preparation of the sales forecast.
Simple linear regression is a technique in which a linear equation states the relationship
among three variables.
Y = a + bx
Y - is a dependent variable, x is an independent variable,
a - is a constant, and
b - is the slope of the line (the change in Y divided by the change in x).
After forecasting sales for the budget period, expenses must be estimated.
Production budget: estimate of the number of units to be produced to meet the sales
forecast.
The last step in preparing the operating budget is to estimate the operating expenses
for the period.

o

 fixed costs
 variable costs
 mixed costs
The Cash-Flow Budget

A statement of estimated cash receipts and expenditures over a specified period of time
is considered the cash-flow budget.

o Cash sales
o Cash payments received on account
o Loan proceeds
6.3 Pro Forma Statements

The final step in the budget process. These are projections of a firm’s financial position
during a future period or on a future date. There are two kinds of pro forma statements.
 Income statements—done first, as in normal accounting. The firm will have already
prepared the pro forma income statements for each month in the budget period.
 Balance sheet— followed by the income statement as in the normal accounting
cycle but is more complex. The last balance sheet prepared before the budget
period began, the operating budget, and the cash-flow budget are needed to
prepare it.
6.4 Capital Budgeting
A technique the entrepreneur can use to help plan for capital expenditures. The first
step is to identify cash flows and timing. The second step is to obtain reliable estimates
of savings and expenses.
There are three common methods used in capital budgeting.
Payback Method
 Easiest
 The length of time required to “pay back” the original investment is the determining
criterion.
 A problem that occurs is that it ignores cash flows beyond payback period.
Net Present Value (NPV)
 This technique helps to minimize some of the shortcomings of the payback method
by recognizing the future cash flows beyond the payback period.
 This concept works on the premise that a dollar today is worth more than a dollar in
the future—how much more depends on the applicable cost of capital for the firm.
Internal Rate of Return
 This method is similar to NPV in that the future cash flows are discounted. They are
discounted at a rate that makes the NPV of the project equal to zero. This rate is
what is referred to as the internal rate of return on the project. The project with the
highest IRR is then selected. Thus, a project that would be selected under the NPV
method would also be selected under the IRR method.
 One of the drawbacks to using the IRR method is the difficulty that can be
encountered when using the technique.
6.5 Break-Even Analysis

Entrepreneurs need relevant, timely, and accurate information that will enable them to
price their products and services competitively and still be able to earn a fair profit.
Break-Even Point Computation
It helps determine how many units must be sold to break even at a particular selling
price.
CONTRIBUTION MARGIN APPROACH
Difference between selling price and variable cost per unit is the amount per unit that is
contributed to cover all other costs.
0 = (SP – VC) S – FC or FC = (SP – VC)S
SP = Unit selling price
VC = Variable costs per unit
S = Sales in units
FC = Fixed Cost
GRAPHIC APPROACH
The entrepreneur needs to graph at least two numbers: total revenue and total costs.
The intersection of these two lines is the firm’s break-even point.
HANDLING QUESTIONABLE COSTS
This approach is used when firms have expenses that are difficult to assign. This
technique calculates break-even points under alternative assumptions of fixed or
variable costs to see if a product’s profitability is sensitive to cost behavior.
The decision rules for this concept are as follows: If expected sales exceed the higher
break-even point, the product should be profitable, regardless of the other break-even
point; if expected sales do not exceed the lower break-even point, then the product
should be unprofitable.

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Part I

The Entrepreneurial Mind-Set

PowerPoint Presentation by Charlie Cook

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a

• Identify the different types of risk entrepreneurs

• Myth 2: Entrepreneurs Are Born, Not Made

• Myth 3: Entrepreneurs Are Always Inventors

• Myth 4: Entrepreneurs Are Academic and Social Misfits

• Myth 5: Entrepreneurs Must Fit the Profile

• Myth 6: All Entrepreneurs Need Is Money

• Myth 7: All Entrepreneurs Need Is Luck

• Myth 8: Entrepreneurship Is Unstructured and Chaotic

• Myth 9: Most Entrepreneurial Initiatives Fail

• Myth 10: Entrepreneurs Are Extreme Risk Takers

• Entrepreneurship is the symbol of business

The The The

• The Common Myth of Failure:

• Major Research Themes:

• Major Research Themes (cont’d):

PowerPoint Presentation by Charlie Cook

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a

Social Cognition Entrepreneurial

The mental functions, Posits that knowledge The knowledge

• Sources of Entrepreneurial Stress

Exercising Getting away

Type Direct Effect Examples

Role failure Against the firm Superficial performance appraisal

Role distortion For the firm Bribery

Role assertion For the firm Investing in unethically governed countries

Think of a legal requirement that is not necessarily morally acceptable

A reliance on other social Distinctions between

Survival Lack of a foundation

 “Always Do the Right Thing”

PowerPoint Presentation by Charlie Cook

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a

• Corporate entrepreneurship strategy is

• Reestablishing the drive to innovate:

• Corporate Innovation Training Program 6 modules:

PowerPoint Presentation by Charlie Cook

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a

Environment Pollution control

Energy Conservation of energy in production and marketing operations

Fair Business Practices Employment and advancement of women and minorities

Human Resources Promotion of employee health and safety

Community Involvement Donations of cash, products, services, or employee time

Products Enhancement of product safety

Social Corporate Social

Environmental Activities and processes Actions that appear to

Economic Environmental Social

• Personal income • Hazardous chemical • Unemployment rate

• Percentage of firms in • Hazardous waste • Average commute time

PowerPoint Presentation by Charlie Cook

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a

• The study of the creative pursuit of new ideas

Societal Technology Economic Government

Incongruities Overnight package delivery

Process needs Sugar-free products

Demographic changes Retirement communities for older people

Knowledge-based concepts Mobile (cell phone) technology; pharmaceutical industry;

Prior customer Prior market

Attempts to refine current practices Questions basic assumptions related to

Tends to be means oriented Has little regard for means; is more

Left Hemisphere Right Hemisphere

Left-Hemisphere Skills Right-Hemisphere Skills