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Chapter Six

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Entrepreneurship and Starting a Small Business

McGraw-Hill/Irwin

Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

SHEILA C. JOHNSON
Black Entertainment Television (BET)

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Profile

First African-American woman to become a billionaire and first to own 3 professional sports teams.

BET debuted in 1980.

Johnson developed many of the networks most successful shows like, Teen Summit. Now a part owner in Mistral and CEO of Salamander Hospitality.
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WHAT is ENTREPRENEURSHIP?

The Job-Creating Power of Entrepreneurship in the U.S.

Entrepreneurship -- Accepting the risk of starting

and running a business.

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NOTABLE ENTREPRENEURS

The Job-Creating Power of Entrepreneurship in the U.S.

French immigrant lruthre Irne du Pont de Nemours started Du Pont in 1802. David McConnell borrowed $500 from a friend to start Avon. George Eastman started Kodak with a $3,000 investment in 1880. Jeff Bezos started Amazon.com with investments from his family and friends.
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YOURE NEVER TOO YOUNG to be an ENTREPRENEUR

(Spotlight on Small Business)

* *

Leanna Archer At 12 years old, she has her own

hair care line.

Alexis Holmes Started baking for a fundraiser,

now the 16-year-old owns her own bakery.

Jack Short & Daniel Lyons The two medical

students started Factory Green, a carbon neutral apparel company, as undergrads.

Mark Zuckerberg Launched Facebook as a

Harvard freshman.
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YOURE NEVER TOO OLD to be an ENTREPRENEUR EITHER!

The Job-Creating Power of Entrepreneurship in the U.S.

Age Range
55 to 59
60 to 65 66 to 70

Percent Identified as Self-Employed

28%
36% 42%

Source: Entrepreneur, www.entrepreneur.com, March 2009.

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WHY TAKE the RISK?

Why People Take the Entrepreneurial Challenge

LG1

Opportunity Profit Independence Challenge

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WHAT DOES IT TAKE to be an ENTREPRENEUR?
Self-directed Self-nurturing Action-oriented

Why People Take the Entrepreneurial Challenge

LG1

Highly energetic
Tolerant of uncertainty

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An IDEA is a GOOD OPPORTUNITY IF
It fills customers needs.

Turning Your Passion and Problems into Opportunities

LG1

You have the skills and resources to start a business. You can sell the product or service at a reasonable price and still profit. You can get your product or service to customers before the window of opportunity closes. You can keep the business going.
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SOCIAL ENTREPRENEURSHIP: RESPONSIBLE and PROFITABLE

(Thinking Green)

THINKING GREEN LOGO

Gary Hirshberg of Stonyfield Yogurt wanted to run a profitable business that didnt hurt the environment. Stonyfield Yogurt is a 100% organic operation. Its green practices save the company millions of dollars each year. After just 15 years, Stonyfield outsells Kraft Foods yogurt.
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ENTREPRENEURIAL TEAMS
Entrepreneurial team -- A
group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product.

Entrepreneurial Teams

LG1

An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apples success.
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MICROPRENEURS

Micropreneurs and Home-Based Businesses

LG1

Micropreneur -- Entrepreneurs willing to accept the

risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle.

Many micropreneurs are home-based business owners writers, consultants, video producers, architects, bookkeepers, etc. Nearly 60% of home-based micropreneurs are men.
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HOME-BASED BUSINESS GROWTH

Micropreneurs and Home-Based Businesses

LG1

Computer technology has leveled the playing field.

Corporate downsizing has led many to venture on their own. Social attitudes have changed.

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

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BENEFITS of HOME-BASED BUSINESSES

Micropreneurs and Home-Based Businesses

LG1

Ability to start your business immediately Minimal startup capital needed No rent or excessive set-up charges Comfortable working conditions
Reduced wardrobe expenses No commuting Tax benefits Elimination of office politics Low risk for trial and error
Source: St. Louis Small Business Monthly, February, 2004.

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DOWNSIDES of HOME-BASED BUSINESSES

Micropreneurs and Home-Based Businesses

LG1

Difficult to establish work habits

Limited support system Isolation

Work space may be limited

Disruption of personal life Clients may be uncomfortable coming to your home Zoning restrictions Success is based 100% on your efforts
Source: St. Louis Small Business Monthly, February, 2004.

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OUTSOURCING YOUR SMALL BUSINESS

(Reaching Beyond Our Borders)

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The latest outsourcing trend is using the Internet to find affordable labor around the world. Elance provides small businesses with a hub to find low-cost contractors. Thanks to the inexpensive freelancers, Elance now has 48,500 clients, up 70% since 2007.

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ONLINE BUSINESS
Web-based businesses have more unique products than most brick and mortar stores. Online sales reached $165.9 billion in 2007, 8% of all retail sales.

Web-Based Businesses
LG1

Affiliate Marketing -- An Internet-based marketing

strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website.
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INTRAPRENEURS
Entrepreneurship Within Firms

LG1

Intrapreneur -- A creative person who works as an

entrepreneur within a corporation.

Intrapreneurs use a companys existing resources to launch new products for the company. Art Fry of 3M developed PostIts when he was trying to mark pages of his hymnal without damage.
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GOVERNMENT and ENTREPRENEURSHIP

Encouraging Entrepreneurship: What Government Can Do

LG1

Immigration Act passed in 1990 created a category of investor visas that encourage entrepreneurs to come to the U.S. Enterprise Zones -- Specific geographic areas to
which governments attract private business investment by offering lower taxes and other government support.

Incubators -- Offer new businesses low-cost offices

with basic services.
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PROGRESS ASSESSMENT
Why are people willing to take the risks of entrepreneurship?

Progress Assessment

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What are the advantages of entrepreneurial teams? How do micropreneurs differ from other entrepreneurs? What are some opportunities and risks of webbased businesses?
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SMALL BUSINESSES

Small Versus Big Business

LG2

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

Businesses are small in relationship to other businesses in their industries.

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SMALL BUSINESS STATISTICS

Small Versus Big Business

LG2

There are 26.8 million small businesses in the U.S.

Of all nonfarm business in the U.S., almost 97% are considered small. Small businesses account for over 50% of the GDP.

Small businesses generate 60-80% of new jobs.

About 80% of U.S. workers first jobs were in small business.
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ADVANTAGES of SMALL OVER BIG BUSINESS

More personal customer service.

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Importance of Small Business LG2

The ability to respond quickly to opportunities.

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BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE

Owner closing a business to start another is reported as a failure.
Changing forms of ownership is reported as a failure. Retirement is reported as a failure.

*Small Business
Success & Failure LG2

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THEY DID WHAT?

Famous Business Failures

*Small Business
Success & Failure LG2

Tommy Hilfiger First store went bankrupt Milton Hershey First confectionary failed H.J. Heinz Company went bankrupt six years after start

Walt Disney First film company went bankrupt Henry Ford First two car companies failed L.L. Bean Almost went bankrupt in first year
Source: World Features Syndicate, 2009.

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LEARNING ABOUT SMALL BUSINESS

Learning About Small Business Operations

LG3

Learn from Others Investigate your local

colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs. Get Some Experience Gain three years experience in the field; then start a part-time small business. Take Over a Successful Firm Serve as an apprentice and eventually take over once the owner steps down.
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GOING DOWN WITH the SHIP
(Making Ethical Decisions)

Suppose you worked in a company for two years and you see signs of it faltering. You and a coworker have ideas about how to succeed and are considering quitting to start your own company.
Should you approach other coworkers about working for your new venture? Will you try to lure your old boss customers? What are the alternatives? What are the consequences? What is the most ethical choice?
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MAJOR BUSINESS FUNCTIONS

Managing a Small Business LG4

Planning Financing Knowing customers Managing employees

Keeping records

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BUSINESS PLANS
Begin with Planning
LG4

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

A business plan forces potential owners to be specific about what they will offer. A business plan is mandatory for talking with bankers or investors.
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WRITING a BUSINESS PLAN
A good plan takes a long time to prepare.
A good executive summary catches interest and tempts potential investors to read on. Getting the plan into the right hands is almost as important as getting the right information in it.
Writing a Business Plan
LG4

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A FAMILY AFFAIR
What to Consider Before Starting a Family Business
Writing a Business Plan
LG4

Clarify Expectations What will each person

contribute?

Discuss Work/Family Boundaries What is the

line that separates work from personal relationships?

Develop Good Communication Agree about

types of decisions youll make jointly and on own.

Clarify Long-Term Intentions Discuss how long

everyone will work full time and goals for the business.

Have an Escape Hatch Have a Plan B.

Source: Business Week Small Biz, www.businessweek.com, February/March, 2008.

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SOURCES of CAPITAL
Personal savings Relatives Former employers Banks & finance companies Government agencies Angel investors

*Getting Money
to Fund a Small Business LG4

Venture capitalists -- Individuals or companies

that invest in new businesses in exchange for partial ownership.
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ANGELS ABOVE
Industry Sectors Favored by Angel Investors

*Getting Money
to Fund a Small Business LG4

Source: CFO Magazine, www.cfo.com, September 2008.

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The SMALL BUSINESS ADMINISTRATION

*The Small
Business Administration LG4

Small Business Administration (SBA) -- A

U.S. government agency that advises and assists small businesses by providing management training and financial advice.

SBA started a microloan program in 1991 that provides very small loans to small business owners. Program judges worthiness on belief of the borrowers integrity and soundness of their business ideas.
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The SMALL BUSINESS INVESTMENT COMPANY

*The Small
Business Administration LG4

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

A SBIC must have a minimum of $5 million in capital and can borrow up to $2 from the SBA for each $1 of capital it has. SBICs are able to identify a businesss trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.
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SMALL BUSINESS DEVELOPMENT CENTERS

*The Small
Business Administration LG4

Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states. SBDCs are able to evaluate the feasibility of your idea, develop your business plan and complete your funding application for no charge.

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The MARKET
Knowing Your Customers LG4

Market -- Consumers with unsatisfied wants and

needs who have both resources and willingness to buy.

Set out to fill the markets needs by offering top quality and great service at a fair price.
One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.
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MANAGING EMPLOYEES

Managing Employees
LG4

Hiring, training and motivating employees is critical.

Employees of small companies are often more satisfied with their jobs they feel challenged and respected. Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.
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ACCOUNTING ASSISTANCE
Keeping Records

LG4

Computers simplify the process by helping with inventory control, customer records and payroll.
A good accountant can help in:
Deciding whether to buy or lease equipment. Deciding whether to own or rent a building. Tax planning. Financial forecasting. Choosing sources of financing. Writing requests for funds.
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LEGAL HELP
Looking for Help LG4

Owners need outside consulting advice early in the process.

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

A competent lawyer can help with:
Leases Contracts Partnership agreements Protection against liabilities
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MARKETING RESEARCH
Looking for Help LG4

Marketing decisions need to be made long before introducing a product or opening a store.
A marketing research study can help you:
Determine where to locate. Whom to select as your target market. What is an effective strategy for reaching the market.

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OTHER FORMS OF HELP
A commercial loan officer can help:
Looking for Help LG4

Design an acceptable business plan. Give financial advice. Lend money.

Know the risks associated with the business. How to cover risks with insurance. How to prevent risks with safety devices. More than 10,500 volunteers from industry, trade associations, and education who counsel small business at no cost.
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An insurance agent can help you:

Service Corps of Retired Executives

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PROGRESS ASSESSMENT

Progress Assessment

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Can you describe at least five sections of a business plan?

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SMALL BUSINESS PROSPECTS ABROAD

Going International: Small Business Prospects

LG5

Small and medium-sized businesses accounted for 99% of recent export growth.
Advantages of global trade for small businesses:
Overseas buyers enjoy dealing with individuals. Small companies can usually begin shipping much faster. They provide a wide variety of suppliers. They can give more personal service and attention.
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PROGRESS ASSESSMENT

Progress Assessment

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Why do many small businesses avoid doing business overseas? What are some of the advantages small businesses have over large businesses in selling in global markets?

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