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Chapter 5. Entrepreneuring / Venturing
This chapter should be helpful if any of these five conditions apply to you.
1. You have an idea for a product or service and you want to build a new business.
2. You want to start a new
business, but do not have an idea for a product or service.
3. You want to increase your success in responding to changing conditions.
4. You see an opportunity for a new venture in your company.
5. You are unemployed and the prospects for a new job are not good.
Entrepreneuring is potentially
rewarding but it’s also risky. Therefore, I do not encourage you
or discourage you from following the entrepreneurial route. My
job is to show you how to reduce the risks and to increase the possible
gains of entrepreneuring.
1. What Do Entrepreneurs Do? Why Do They Do It?
An entrepreneur creates,
organizes, manages and assumes the risks of a new business.
Synonyms for entrepreneur include: capitalist, magnate, mogul,
tycoon. Entrepreneuring is the act of starting a new venture as
an independent business.
"Innovating" is starting a new
venture within an existing business firm. Synonyms for innovator
include: originator, creator, developer. Entrepreneurs and
innovators make something new happen. Perhaps, if the
entrepreneur had not started the new business, someone else might
have. Perhaps not.
While each new enterprise usually
starts as a small business and often remains small, entrepreneuring, on
a national scale is a very big and important business. In a
typical year, small independent businesses created 2.6 million jobs,
while large corporations eliminated 1.6 million jobs. Without
entrepreneurs, our economy would decline.
Entrepreneurs are not motivated
only by patriotism when they start their new ventures. According
to what entrepreneurs say, they are motivated by desire to:
1. Be his or her own boss.
2. Become rich and famous.
3. Help
partners, stockholders and employees to make a lot of money.
4. Prove something to a parent.
5. Use their skills.
6. Enjoy a sense of achievement.
7. Earn a living when jobs are not available.
Also, while this may not be the
initial motivation, successful entrepreneurs often give large amounts
of money, or stock to charitable organizations. Sometimes they
even fund museums, or colleges or hospitals.
2. Personal Characteristics of Successful Entrepreneurs
Research studies have discovered
that successful entrepreneurs tend to have certain personal
characteristics. Successful entrepreneurs . . .
1. Identify
opportunities. When they see that someone has a problem, they
perceive this as an opportunity to make a profit by supplying a product
or service to solve the problem.
2. Act. Instead of
waiting for things to happen, entrepreneurs make them happen.
3. Seek to improve.
Entrepreneurs have contempt for "what is." They are constantly
learning, experimenting, changing, improving.
4. Orient themselves to
customers’ needs. They constantly ask: "What can we do for our
customers today?"
5. Value their
employees. They allow their employees to make decisions and to
grow and reward them accordingly. They see to it that the most
attractive option for all their employees is always to stay with the
company and to help it grow.
6. Face reality. They
plan thoroughly and balance their optimism with realistic appraisal of
the risks they face.
7. Tolerate tedium.
Much of starting and running a business is paying close attention to
details. Entrepreneurs pay attention to the details.
8. Rebound from
disappointments. Success in business takes time and overcoming
many difficulties. Successful entrepreneurs stay the
course. If they fail, they try again.
Not many people have all these
qualities and quite a few entrepreneurs have made fortunes even if they
did not always treat their employees with respect or tolerate tedium
particularly well. The point is that these qualities are useful
and it pays for you to develop them, if they are lacking.
3. How Entrepreneurs Get Good Ideas for New Ventures
Most of the time, entrepreneurs
get their ideas from prior employment. They go into competition
with their former employers or acquire a business that failed, possibly
their employer’s business. There may be some legal issues in such
a situation if the employee has a non-compete contract with the
employer. On the other hand, employers cannot stop former
employees from using their knowledge and skills to earn a living.
A second source of ideas is
acquisition of rights from a business firm that is willing to license a
process or product or from a non-profit organization that has developed
a product and wants to keep its non-profit status.
Related to this approach is the
possibility of franchising, which involves buying a complete business
idea and training from the franchising corporation. Examples are
all around us: MacDonald’s, Burger King, Midas Muffler, etc. This
may be a fruitful approach, but you should be cautious. Horror
stories have been published telling how unscrupulous promoters were
more interested in collecting up-front fees than in helping the
entrepreneur to succeed in business. Another possible drawback is
that the best franchises usually require large investments. For
ideas about franchises, read Entrepreneur magazine and see the newest
edition of the book "The 220 Best Franchises to Buy," by Constance
Jones, published by Bantam.
A third possibility is to team up
with an inventor who wants to share the burden of starting up with
someone who will handle the business end of the enterprise.
Other sources of new venture
ideas include self-employment, hobbies and suggestions made by someone
else.
The surprising finding of
extensive research in the area of start-up ideas is that new venture
ideas rarely come as a result of methodical search. This does not
mean that methodical search is a bad strategy, it’s just that not many
entrepreneurs have used it. Several examples cited in Karl
Vesper’s book, New Venture Strategies, show that methodical search can
lead to profitable new ventures:
One
entrepreneur asked all his business acquaintances to inform him of all
interesting new ideas they knew of. Eventually, he started a
successful business and people kept bringing him interesting
ideas. Presumably, he compensated the idea bringers.
Another
entrepreneur asked marketing people in one industry what customers were
asking for and had trouble getting. This also resulted in a
successful business.
A third
entrepreneur asked purchasing agents what they were having trouble
buying. This approach also gave rise to a successful
business. A surprising by-product of methodical searching for
business ideas is a gain in creativity for the searcher, which also
leads to profitable ideas for starting a new business.
4. What Do You Absolutely Need for Success?
You need five ingredients for success:
1. An idea for a product or
service that customers are willing to buy at a sufficiently high price
to allow for a big margin above cost.
2. The ability to provide the product or service.
3. Personal contacts for acquiring information and other resources.
4. Money to keep the business going during the start-up phase.
5. Sufficient customer
orders to cover all costs and expenses and to provide a profit.
Many entrepreneurs have tried to
start businesses without giving enough attention to each of these
requirements, and their businesses failed.
5. How to Increase the Odds in Your Favor
Factors that influence the
probability of success include: choice of industry, education and
experience of the entrepreneur, formation of personal contacts and
starting capitalization. Strategies that tend to lead to
entrepreneurial success are discussed below.
1. Choose a growing
industry, as opposed to one that is crowded with suppliers. Take
advantage of major trends. For many years, we were in the era of
"do-it-yourself." Now because of severe time pressures, many
people are buying services that they used to provide for themselves,
such as preparing food and taking care of children. To reduce
employee costs, many businesses are contracting out for services:
cleaning, food service, computer programming.
2. Get appropriate education and experience, as follows:
a) Get higher education. For high technology,
your should have a college degree and graduate work. If your
field is low-tech, some college work may suffice.
b) Get work experience in several functional areas,
including marketing and finance and hands-on experience in production
and selling.
c) Work for business firms in their start-up phase to
get specific entrepreneurial experience. This experience should
be in the same industry as your intended enterprise and should
definitely include the activities that are characteristic of successful
entrepreneuring: networking and negotiating.
3. Establish a wide net of
contacts to help you with every phase of the start-up. Family and
friends can help directly or lead to other connections that will be
useful. Informal contacts will help you in selecting a location,
raising capital, finding partners and key employees, obtaining permits
and even finding customers for your product or service. Look for
free advisory services provided by state governments, often in
conjunction with business schools.
4. Make sure that you have
enough capital at start-up, so that you do not run out of money before
your business starts generating a positive cash flow. This
requires excellent planning, which we will discuss again later.
5. Retain a lawyer and an
accountant with extensive experience in business start-ups, preferably
in your industry.
6. Establish reliable connections with vendors who will be supplying your materials.
6. Developing the New Enterprise
The newness of the
entrepreneurial business gives it competitive disadvantages. To
succeed, it has to overcome buyers’ resistance to change and suspicion
of strangers. This point is painfully dramatized by the Dun &
Bradstreet finding that "inadequate sales" are the most frequent cause
of business failure, being cited in nearly two fifths of the
cases. Competitive weakness is second, involving one fifth of the
cases and excessive operating expenses are third, accounting for one
tenth of the cases of business failure.
Inadequate sales and competitive
weakness are caused by two classes of problems: not delivering
the exact product or service demanded by the market and inadequate
marketing. Of course, operating expenses would not be excessive
if sales volume generated enough cash to pay for these expenses.
The conclusion is that all aspects of the business affect each other,
and the entrepreneur is responsible for all of them.
The only way to manage the
complex entrepreneurial task and to keep the risks at tolerable levels
is to prepare and maintain a thorough business plan. You, the
entrepreneur must prepare this plan, not a consultant because while the
plan is important, the process of planning is more important.
Business planning must be a
continuous activity done with the understanding that the business plan
is not merely a tool for securing capital but that business planning is
the indispensable organizing device of the new venture.
Continuous business planning is the only way of reducing the
unavoidable risk of any new venture. Business planning cannot be
relegated to being a mere paper exercise. You must learn the
structure of the business plan and relate every action to the
plan. This is the only way to use scarce resources efficiently
and to reduce risk to the lowest possible level.
Other strategies for insuring the
success of the new venture are networking and effective time management.
You must network to secure a wide
range of information. As entrepreneur, you are responsible for
all aspects of the business throughout its infancy. Maximum risk
coincides with minimum experience, a dangerous condition. The
risk is inherent. Lack of knowledge can be reduced by
networking. To make the most efficient use of your time now and
after you start up your new venture, you must become a competent
computer user.
If all of these hurdles have not
discouraged you, here’s the biggest: prepare a business plan, using the
"Business Plan Outline," at the end of this chapter. This is a
long, detailed and demanding outline and filling in all the information
may take quite a while. There are no shortcuts in entrepreneuring
and if you want to give your business a fair chance of success, you
really have to think through all the details and document them.
The key issues are:
The
MARKET. Who will buy your product (or service)? Why will
they buy from you, instead of their present sources? How
much will they buy? How much will they pay? How will you
sell and advertise to motivate them to buy from you? How will you
distribute the product or service to your customers?
The
MONEY. How much will you sell each month for the first 36
months? How much revenue will that bring in? How much
marketing expense will be required? What will be your costs and
expenses (all your costs and expenses, including your living expenses)
during each of the first 36 months? How much cash will you need
above the amount generated by sales? At what point in time will
you have the maximum cash demand? How much will that be?
After you add a substantial percentage to cover forecasting errors, how
much cash do you need to get your business to the point where cash
inflow is greater than cash outflow? Do you have and are you
willing to risk this much? Can you raise the money you
need?
A possible source of money is
"angels." They are successful entrepreneurs who are willing to
risk money in a new venture if it promises a good return. Find
rich people in your area and have an excellent business plan
ready. This will take time and networking.
Venture clubs may also be
helpful. Write to Bruce J. Blechman in care of Entrepreneur
magazine, 2392 Morse Ave., Irvine, CA 92714 for a list of venture
capital clubs and computer matchmaking networks in your area.
Another possible source for funds
are governments. The largest sources are the Small Business
Administration and the Department of Defense. There are many
others, too numerous to list here. You may wish to consult a book
by Mark Rowh, "Winning Government Grants and Contracts for Your Small
Business," published by McGraw-Hill in 1992.
If all sources decline to
participate, you have the option of "boot-strapping," which means
starting small and growing carefully on the cash flow your business
generates. Some guidelines to follow if you are bootstrapping,
and even if you are not:
1. Look for a business that does not require a large capital investment.
2. Offer a high value, high margin product or service.
3. Pick a business that depends on personal selling rather than advertising.
4. Do not select a business
that requires highly paid employees, unless they are willing to take
part of their compensation in company stock.
5. Growth requires cash, lots of cash. Keep growth in check.
6. Watch your expenses.
7. Focus on cash flow.
8. Cultivate banks early (and often).
For additional guidance, you may wish to consult (among other books):
"Starting and Managing the Small
Business," 3rd edition, by Arthur Kuriloff, John Hemphill and Douglas
Cloud, published in New York by McGraw-Hill in 1993.
"New Venture Creation," fourth edition, by Jeffry Timmons, Homewood, IL: R D. Irwin, 1994.
7. A Note about Business Plan Outlines
Virtually every book on
entrepreneuring has a business plan outline. Some are
trivial. Some are reasonable, but incomplete.
In teaching the Entrepreneurship
course, I wanted to give my students as comprehensive a business plan
outline as possible in order to reduce risk to the new
enterprise. I selected the best elements of all the business plan
outlines I could find and assembled my own outline. You should
search the Internet for additional suggestions about what to consider
in developing your plan and the start-up of your business. See
the next Chapter for a comprehensive Business Plan Outline.
8. Going from Business Plan to Business Start-Up
Entrepreneuring is an
evolutionary process. Most new entrepreneurs work as employees of
a business firm when the idea hits that they should start their own
business.
People entertaining such thoughts
have enrolled in my "Entrepreneurial Policy" course. This course
is goal-oriented and each student is required to write an original
business plan for a new business. It is interesting to observe
the transformation of these students from dedicated employees to
potential entrepreneurs.
At the beginning of the semester,
students appear uncomfortable about talking seriously about a
non-existing business. Writing a business plan with financial
projections seems to be an academic exercise. However, as the
term progresses and they investigate the feasibility of their business
concept and as they prepare and present progress reports and as they
begin to fill in their business plan outlines, what started out as a
speculative notion, begins to appear possible. By the end of the
term, each student has a detailed business plan and in some instances,
a new business is on its way. The amazing conclusion is that
imagining, talking and writing about something that does yet not exist
can lead to the beginning of a real enterprise with real customers and
real income.
Not all of them start new
businesses. Some conclude that their present job is more
profitable than the new enterprise. Others are overwhelmed by the
need to watch so many different aspects of the new business at the same
time. Still others conclude that the idea is not feasible - it
will never break even. A small percentage, less than 10% actually
try to start the new business.
Your experience will probably
follow a similar path. As you write your business plan, you will
understand better what is required and what the potential rewards
are. You may decide to go ahead with the new business, or you may
decide to put it aside. In any event, you will learn a great deal
and even if you do not have a successful start-up (or no start-up, at
all) you will be in a better position to succeed next time you consider
entrepreneuring. Some successful entrepreneurs had to start twice
or three times before they succeeded. Good luck!
9. Summary of Preparation for Entrepreneuring
1. Evaluate yourself with
the help of objective tests and by seeking opinions of people who know
you well and are inclined to be candid. The issue is do you have
the eight qualities of successful entrepreneurs? Which ones are
you missing? Can you acquire these missing traits through
training? Prepare a plan for acquiring the missing traits.
2. SCAN three or four
people and/or businesses. Define products or services that would
help them to achieve their objectives more effectively or more
efficiently. Estimate the size of the market for the most
promising product or service you defined.
3. Start networking with
well-informed people to increase your knowledge and to develop the
contacts that you will need for raising capital, hiring key employees,
acquiring a site, signing up customers and any other needs your
business will have.
4. Network with
entrepreneurs. Ask them what has worked well for them and what
problems they have encountered and how they dealt with these
problems. Select entrepreneurs in businesses similar to the one
you are contemplating.
5. Read the Business Plan
Outline (BPO) to become familiar with it. Make it a regular
practice to reread the Business Plan Outline until you know it by heart.
6. f you have not yet
mastered word-processing and spreadsheet analysis, do so.
Obtain catalogs of software mail order houses and order business
planning software on a 30 day trial basis. Use the software to
become familiar with it. Plan ahead and inquire about easy to use
accounting software for small businesses.
7. Write a business plan
for your new business, following the Business Plan Outline in this
chapter presented on the following pages. Consult other sources
for ideas: the Internet, experts in your field, textbooks, professional
associations, consultants, etc. Network and continue networking
for as long as you are professionally active.
This Page was last update:
Thursday, August 18, 2005 at 4:38:50 PM
This page was originally posted: 8/16/2005; 8:26:10 AM.
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