Barringer Chapter 1 Powerpoint

Chapter 1 Introduction to Entrepreneurship Bruce R. Barringer R. Duane Ireland Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Introduction to Entrepreneurship

There is tremendous interest in entrepreneurship in the U.S. and around the world.

According to the 2010 GEM study, 7.6% of Americans are actively engaged in starting a business or are the owner/manager of a business that is less than three years old.

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Indications of Increased Interest in Entrepreneurship • Books – Amazon.com lists over 35,600 books dealing with entrepreneurship and 62,700 focused on small business.

• College Courses – In 1985, there were about 250 entrepreneurship courses offered across all colleges in the United States. – Today, more than 2,000 colleges and universities in the United States (which is about two-thirds of the total) offer at least one course in entrepreneurship.

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What is Entrepreneurship? • Academic Definition (Stevenson & Jarillo) – Entrepreneurship is the process by which individuals pursue opportunities without regard to resources they currently control.

• Venture Capitalist (Fred Wilson) – Entrepreneurship is the art of turning an idea into a business.

• Explanation of What Entrepreneurs Do – Entrepreneurs assemble and then integrate all the resources needed – the money, the people, the business model, the strategy – to transform an invention or an idea into a viable business. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Corporate Entrepreneurship 1 of 2

• Corporate Entrepreneurship – Is the conceptualization of entrepreneurship at the firm level. – All firms fall along a conceptual continuum that ranges from highly conservative to highly entrepreneurial. – The position of a firm on this continuum is referred to as its entrepreneurial intensity.

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Corporate Entrepreneurship 2 of 2

Entrepreneurial Firms • Proactive • Innovative • Risk taking

Conservative Firms • Take a more “wait and see” posture • Less innovative • Risk averse

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Why Become an Entrepreneur? The three primary reasons that people become entrepreneurs and start their own firms Desire to be their own boss Desire to pursue their own ideas Financial rewards

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Characteristics of Successful Entrepreneurs 1 of 3

Four Primary Characteristics

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Characteristics of Successful Entrepreneurs 2 of 3

• Passion for the Business – The number one characteristic shared by successful entrepreneurs is a passion for the business. – This passion typically stems from the entrepreneur’s belief that the business will positively influence people’s lives.

• Product/Customer Focus – A second defining characteristic of successful entrepreneurs is a product/customer focus. – An entrepreneur’s keen focus on products and customers typically stems from the fact that most entrepreneurs are, at heart, craftspeople. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Characteristics of Successful Entrepreneurs 3 of 3

• Tenacity Despite Failure – Because entrepreneurs are typically trying something new, the failure rate is naturally high. – A defining characteristic for successful entrepreneurs is their ability to persevere through setbacks and failures.

• Execution Intelligence – The ability to fashion a solid business idea into a viable business is a key characteristic of successful entrepreneurs.

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What Went Wrong? - How a lack of passion and too few customers can kill a business. • YouCastr hatched in mid-2006 during a road trip. • How about creating a platform that people could use to provide live commentary for sporting events? • They built an alpha version. • Eventually each member of the team quit their job.

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What Went Wrong? - How a lack of passion and too few customers can kill a business. • YouCastr started as a virtual sports bar. • Their business model called for the firm to take a commission on the sales its site generated. • Reasons why YouCastr failed: – Company ran out of money – Market was not there – Assumed people were willing to pay for audio and video sporting events – Lack of passion pertaining to sports and broadcasting Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Common Myths About Entrepreneurs 1 of 5

• Myth 1: Entrepreneurs Are Born, Not Made – This myth is based on the mistaken belief that some people are genetically predisposed to be entrepreneurs. – The consensus of many studies is that no one is “born” to be an entrepreneur; everyone has the potential to become one. – Whether someone does or doesn’t become an entrepreneur is a function of their environment, life experiences, and personal choices.

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Common Myths About Entrepreneurs 2 of 5 Although no one is “born” to be an entrepreneur, there are common traits and characteristics of successful entrepreneurs • A moderate risk taker

• Optimistic disposition

• A networker

• Persuasive

• Achievement motivated

• Promoter

• Alert to opportunities

• Resource assembler/leverager

• Creative

• Self-confident

• Decisive

• Self-starter

• Energetic

• Tenacious

• Has a strong work ethic

• Tolerant of ambiguity

• Lengthy attention span

• Visionary

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Common Myths About Entrepreneurs 3 of 5

• Myth 2: Entrepreneurs Are Gamblers – Most entrepreneurs are moderate risk takers. – The idea that entrepreneurs are gamblers originates from two sources: • Entrepreneurs typically have jobs that are less structured, and so they face a more uncertain set of possibilities than people in traditional jobs. • Many entrepreneurs have a strong need to achieve and set challenging goals, a behavior that is often equated with risk taking.

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Common Myths About Entrepreneurs 4 of 5

• Myth 3: Entrepreneurs Are Motivated Primarily by Money – While it is naïve to think that entrepreneurs don’t seek financial rewards, money is rarely the reason entrepreneurs start new firms. – In fact, some entrepreneurs warn that the pursuit of money can be distracting.

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Common Myths About Entrepreneurs 5 of 5

• Myth 4: Entrepreneurs Should Be Young and Energetic – Entrepreneurial activity is fairly easily spread out over age ranges. – While it is important to be energetic, investors often cite the strength of the entrepreneur as their most important criteria in making investment decisions. • What makes an entrepreneur “strong” in the eyes of an investor is experience, maturity, a solid reputation, and a track record of success. • These criteria favor older rather than younger entrepreneurs. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Types of Start-Up Firms

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Changing Demographics of Entrepreneurs 1 of 3

Women Entrepreneurs • There were 6.2 million womenowned businesses in 2002 (the most recent statistics available) • This number was up 20% from 1997. • There are a growing number of organizations that support and advocate for women-owned businesses. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Changing Demographics of Entrepreneurs 2 of 3

Minority Entrepreneurs • There has been a substantial increase in minority entrepreneurs in the U.S. from 1996 to 2010. • The biggest jump has come in Latino entrepreneurs, which increased from 11% to 23% from 1996 to 2010.

Senior Entrepreneurs • The percentage of U.S. entrepreneurs who are seniors jumped from 15% to 23% from 1996 to 2010. • The increase is attributed to corporate downsizing, a desire among older workers for more fulfillment in their lives, a need for additional income, and similar factors.

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Changing Demographics of Entrepreneurs 3 of 3

Young Entrepreneurs • Interest among young people in entrepreneurial careers is high. • According to a Harris Interactive survey, 40% of people eight to 21 years old said they’d like to start their own business someday. • A total of 59% of the 8- to 21- year olds said they know someone who has started their own business.

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Economic Impact of Entrepreneurial Firms • Innovation – Is the process of creating something new, which is central to the entrepreneurial process. – Several studies have found that small businesses outperform their larger counterparts in terms of obtaining patents.

• Job Creation – Small businesses are the creators of most new jobs in the U.S., and employ half of all private sector employees. – According to a Kauffman Foundation survey, 92% of Americans say entrepreneurs are critically important to job creation. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Entrepreneurial Firms’ Impact on Society and Larger Firms • Impact on Society – The innovations of entrepreneurial firms have a dramatic impact on society. – Think of all the new products and services that make our lives easier, enhance our productivity at work, improve our health, and entertain us in new ways.

• Impact on Larger Firms – Many entrepreneurial firms have built their entire business models around producing products and services that help larger firms become more efficient and effective. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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The Entrepreneurial Process The Entrepreneurial Process Consists of Four Steps Step 1: Deciding to become an entrepreneur. Step 2: Developing successful business ideas. Step 3: Moving from an idea to an entrepreneurial firm. Step 4: Managing and growing the entrepreneurial firm.

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Sources of Equity Funding

Venture Capital

Business Angels

Initial Public Offerings

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Business Angels 1 of 2

• Business Angels – Are individuals who invest their personal capital directly in start-ups. – The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the startup process. – The number of angel investors in the U.S. has increased dramatically over the past decade.

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Business Angels 2 of 2

• Business Angels (continued) – Business angels are valuable because of their willingness to make relatively small investments. • These investors generally invest between $10,000 and $500,000 in a single company. • Are looking for companies that have the potential to grow between 30% to 40% per year. – Business angels could be found in every community

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Venture Capital 1 of 3

• Venture Capital – Is money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential. – There are about 650 venture-capital firms in the U.S. that provide funding to about 2,600 firms per year. • Venture-capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms. • The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources. • A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a three- to five-year period.

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Venture Capital 2 of 3

• Venture Capital (continued) – Venture capital firms fund very few entrepreneurial firms in comparison to business angels. • Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan. • Venture capitalists are looking for the “home run” and so reject the majority of the proposals they consider. • Still, for the firms that qualify, venture capital is a viable alternative for equity funding.

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Venture Capital 3 of 3

• Venture Capital (continued) – An important part of obtaining venture-capital funding is going through the due diligence process: – Venture capitalists invest money in start-ups in “stages,” meaning that not all the money that is invested is disbursed at the same time. – Some venture capitalists also specialize in certain “stages” of funding.

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Initial Public Offering 1 of 3

• Initial Public Offering – An initial public offering (IPO) is a company’s first sale of stock to the public. When a company goes public, its stock is traded on one of the major stock exchanges. – Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks. – An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future. 10-31

Initial Public Offering 2 of 3

Reasons that Motivate Firms to Go Public Reason 1

Reason 2

Is a way to raise equity capital to fund current and future operations.

Raises a firm’s public profile, making it easier to attract high-quality customers and business partners.

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Initial Public Offering 3 of 3

Reasons that Motivate Firms to Go Public Reason 3

Reason 4

Is a liquidity event that provides a means for a company’s investors to recoup their investments.

Creates a form of currency that can be used to grow the company via acquisitions.

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Sources of Debt Financing

Commercial Banks

SBA Guaranteed Loans

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Commercial Banks • Banks – Historically, commercial banks have not been viewed as a practical sources of financing for start-up firms. – This sentiment is not a knock against banks; it is just that banks are risk adverse, and financing start-ups is a risky business. • Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.

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SBA Guaranteed Loans 1 of 2

• The SBA Guaranteed Loan Program – Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program. – The program operates through private-sector lenders who provide loans that are guaranteed by the SBA. – The loans are for small businesses that are not able to obtain credit elsewhere.

• The 7(A) Loan Guaranty Program – The most notable SBA program available to small businesses. 10-36

SBA Guaranteed Loans 2 of 2

• Size and Types of Loans – Almost all small businesses are eligible to apply for an SBA guaranteed loan. – The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000. – An SBA guaranteed loan can be used for almost any legitimate business purpose. – Since its inception, the SBA has helped make $280 billion in loans to nearly 1.3 million businesses.

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