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You can't cross the sea merely by standing and staring at the water.
--Rabindranath Tagore
It's not how many times we stumble and fall down that matters.
It's how many times we stumble and get back up that counts.
--Max Carey, Jr.
Learning Objectives
Students will be able to:
1. Define the role of the entrepreneur in the U.S. economy.
2. Describe the entrepreneurial profile.
3. Describe the benefits of owning a small business.
4. Describe the potential drawbacks of owning a small business.
5. Explain the forces that are driving the growth in entrepreneurship.
6. Discuss the role of diversity in small business and entrepreneurship.
7. Describe the contributions small businesses make to the U. S. economy.
8. Explain the reasons small businesses fail.
9. Put business failure into the proper perspective.
10. Explain how small business owners can avoid the major pitfalls of running a business.
Instructor’s Outline
I. Introduction
A. The dramatic resurgence of the entrepreneurial spirit:
1. A recent study by the National Panel Study of U.S. Business Start-Ups found
that 8 million people, or one in 25 adults, were actively engaged in trying to launch a new
business.
2. This resurgence of the entrepreneurial spirit is the most significant economic
development in recent business history.
3. Entrepreneurs have introduced innovative products and services, pushed back
technological frontiers, created new jobs, opened foreign markets.
4. As a result, they sparked the U.S. economy into regaining its competitive edge in
the world.
5. In 1969, entrepreneurs created 274,000 new corporations; today, the number of
new incorporations exceeds 800,000 per year.
6. In a recent survey of college seniors, 49 percent of the men and 31 percent of the
women said they were interested in pursuing entrepreneurship when they
graduate.
1
2 Section I - The Challenge of Entrepreneurship
2. Although launching a business is never easy, the resources available today make
the job much simpler today than ever before since thousands of colleges and
universities offer courses in entrepreneurship.
3. Internet hosts a sea of information on launching a business including sources of
capital.
4. Another significant shift in growth of small company has been due to significant
shift in our nation's economic structure (rapidly moving away from an industrial
economy to a knowledge-based one).
The first obstacle Stamp faced was figuring out how to capture icebergs and process them.
Stamp met Paul Benson, owner of a spring water business, and the two formed Iceberg
Industries. In addition to raising $500,000 from investors, Stamp and Benson finally developed a
workable method for harvesting icebergs. They purchased a barge with heated tanks onboard
and converted it into a floating water factory. Outfitted with a crane and a hydraulic grapple
originally designed to bite chunks out of granite, the barge is towed by a tugboat into the Atlantic
each spring, where it spends the next eight months harvesting icebergs. The tugboat lassos the
iceberg and pulls it next to the barge, where the grapple bites off a half-ton chunk of ice.
Another device equipped with rotating steel teeth crushes the ice before it goes into the heating
tanks. There, the ice is melted and filtered. Once the holding tanks are filled, the tug tows entire
barge to Iceberg Industries’ processing plant in Newfoundland, where final filtering and bottling
takes place.
Iceberg Industries went public in 2000, but its two founders still own 15 percent of the
company’s stock. In addition to its line of bottled water, Iceberg Industries has partnered with
other Newfoundland businesses to produce beer (Borealis Iceberg Beer) and vodka (Borealis
Iceberg Vodka) with its pure water.
Entrepreneurs in Space.
Since Congress passed the Commercial Space Act, which legalized private manned space flights,
in 1997. One organization, the X PRIZE Foundation, is offering $10 million to the first
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 3
entrepreneur who can build a spacecraft that carries three people 62 miles into space twice within
two weeks. Although no one has qualified for the $10 million prize yet, some entrepreneurs are
not waiting to get into the space tourism business. Space Adventures Ltd. is booking passengers
on a variety of space-related adventure vacations, ranging from terrestrial tours of Meteor Crater
to high-altitude flights in Russian MiG fighter jets. Top Gun wannabes can fly with an
experienced pilot at speeds of up to Mach 2.5 (1,850 miles per hour) and altitudes up to 80,000
feet! Airborne thrills don’t come cheap, however; prices range from $3,400 up to $13,000.
Customers also can experience weightlessness like astronauts in outer space without ever leaving
earth’s atmosphere on the Russian-built Flying Laboratory (nicknamed the “Vomit Comet”). As
the plane flies in a series of parabolic curves, its occupants experience about 25 seconds of zero
gravity.
Space Adventures’ most ambitious project is a sub-orbital space flight that will take
adventurers 100 kilometers into space. The fact that the company does not yet have a vehicle
capable of accomplishing this mission has not slowed down hopeful space travelers. Already,
more than 100 people have paid the $6,000 deposit to reserve a spot on the $98,000 two-hour trip
into space. The company has agreements with six of the most promising companies working to
build reusable space vehicles, so Space Adventures customers will be among the first tourist to
travel into space when a vehicle is available.
1. Assume that you are a banker and these entrepreneurs approached you with a loan request
to start these companies. What questions will you ask them? Would you approve the
loan? Explain.
Answer: The discussion should focus on the evidence of the viability of these businesses
and what personal commitment the entrepreneurs have in them, i.e., personal investment.
2. Using these business ventures as a source of inspiration, work in a team with two or three
of your classmates to generate ideas for unusual business ventures that you could start.
Answer: Each group will have different idea. Student should consider the market
viability of their business ventures.
3. Select one idea from those your team generated in question 2. What could you do to
convince skeptical lenders or investors to put money into your company and to increase
the probability of its success?
Answer: Student’s answer will vary. However, students must understand that in
regards to money, both lenders and investors require solid financial documentations,
forecasting the success probability.
B. Choosing entrepreneurship:
1. Have been downsized or laid off 5%
2. Wanted to fulfill lifelong goal 25%
3. Tired of working for someone else 27%
4. Wanted more control over future 36%
5. Joined family business 41%
C. Entrepreneurial profile
1. Desire for responsibility.
4 Section I - The Challenge of Entrepreneurship
D. Other characteristics
1. High degree of commitment.
a) An Entrepreneur’s commitment to his or her and the business it spawns
determines how successful his or her company ultimately becomes.
2. Tolerance for ambiguity.
a) Entrepreneurs tend to have a high tolerance for ambiguous, ever-changing
situations.
3. Flexibility.
a) Entrepreneurs must be willing to adapt their businesses to meet changes.
4. Tenacity.
a) Successful entrepreneurs have the willpower to conquer the barriers that
stand in the way of their success.
E. Study of business owners by Yankelovich Partners for Pitney Bowes Inc. identified
5 different entrepreneurial personalities:
1. Idealists.
a) Idealists started their businesses because they had a great idea or wanted to
work on something special.
b) Idealists enjoy creative work but are impatient with performing
administrative tasks such as financial analysis or legal matters.
c) This group of entrepreneurs and their businesses are most dependent on
computers.
2. Optimizers.
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 5
Stephanie Hirsch, after graduating from college, moved to Los Angeles, where she tried several
jobs before taking a job as a fashion stylist in New York. Hirsch enjoyed the fashion business,
but she felt stifled working for someone else; an entrepreneurial spring was bubbling up inside
her.
Hirsch decided to go to Lima, Peru to visit a friend and to celebrate the new year in South
America. On several trips to a festive open-air market in the city, the colorful fabrics and
designs that surrounded her overwhelmed Hirsch. She also drew inspiration from many
churches, cathedrals, and spiritual places she visited. While hiking on the Inca Trail, Hirsch
decided to create a business selling fashionable plastic handbags made in the rich, vibrant colors
she had seen on her trip. When she returned to New York, Hirsch, then just 24, designed a line
of bags, found a manufacturer, and launched Inca Girl Enterprises.
Inca Bags became a tremendous hit, showing up first on the arms of celebrities such as Cameron
Diaz, Liv Tyler, Halle Berry, Courtney Cox, Elizabeth Hurley, Cindy Crawford, and many
others. Hirsch has expanded Inca Girl’s product line to include mini skirts, sarongs, belts,
beaded bathing suits, and beach mats. The company received a huge publicity boost when
Sports Illustrated used Inca Girl swimsuits on some of its models in the magazine’s famous
“Swimsuit” issue. Inca Girl suits garnered four full pages of coverage in the popular issue.
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 7
Hirsch continues to expand her business, selling her products through outlets such as Henri
Bendel, Saks Fifth Avenue, and Bergdorf Goodman as well as through the company’s Web site.
Hirsch also runs her company with an eye on its social responsibility. Through her business, she
supports a variety of charitable organizations, including Hale House and the Doe Fund.
Stephanie Hirsch proves that age puts no limit on entrepreneurial ability. Her creativity and hard
work have enabled her to guide her company to more than $3 million in sales.
1. In addition to the normal obstacles of starting a business, what other barriers do young
entrepreneurs face?
Answer: Student’s response may vary. Most common answers are lack of funds, low
working capital, and no knowledge of the industry.
2. What factors do you think contribute to a young person taking the risk of starting a
business?
Answer: Student’s response may vary.
3. Does Stephanie Hirsch demonstrate the entrepreneurial personality? Explain.
Answer: Student’s response may vary. Most common answers are: Idealists, then
optimizer, and finally, Hard Worker.
F. Complete responsibility
1. Entrepreneurs end up taking on issues with which they are not knowledgeable.
2. The owner is the business.
G. Discouragement
1. Requires much dedication, discipline, and tenacity.
2. Entrepreneurs will run headlong into many obstacles, some of which may
appear to be insurmountable.
3. Discouragement and disillusionment can set in.
B. Entrepreneurial education
1. More colleges and universities are offering courses; more students see
entrepreneurship as a career option.
2. 1,500 colleges and universities offer courses to 15,000 students.
E. Technological advancements
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 9
1. Make it easier for entrepreneurs to start and run a business, faxes, computers,
voice mail, etc.
2. Example of Scott Adams.
a) Scott Adams, creator of the Dilbert cartoon strip runs his entire business from
a home office with a custom-made desk and a host of high-tech gadgetry.
F. Independent lifestyles
1. Entrepreneurship fits the American life, independence and self-sufficiency.
H. International opportunities
1. 95% of the world's population lives outside of U.S. borders.
2. Small businesses account for 96 percent of all exporters; however, they
account for just 20 percent of total exports.
3. Richard Allred story.
a) Richard Allred launched a company that produces surf-related clothing
and apparel. Toes on the Nose Corporation domestic sales grew quickly, but Allred also saw
opportunities to sell his products in foreign markets such as Australia, Canada, Great Britain,
and Japan.
B. Women Entrepreneurs
1. Small business has been a leader in offering women opportunities for
economic expression through employment and entrepreneurship.
2. Increasing numbers of women are discovering that the best way to break the
"glass ceiling" that prevents them from rising to the top of many organizations is to start their
own companies (see Figure 1.3).
3. Women are opening businesses at a rate twice that of the national average
10 Section I - The Challenge of Entrepreneurship
4. Women are launching businesses in fields that traditionally have been male-
dominated.
5. The 9.1 million women-owned companies across the United States employ
27.5 million workers, about 20 percent of all company workers in the country.
6. Women own about 38 percent of all businesses, and these companies generate
approximately $3.7 trillion in sales each year.
C. Minority Enterprises
1. Asians, Hispanics, and African-Americans, respectively, are most likely to
become entrepreneurs.
2. Like women, minorities cite discrimination as a principal reason for their
limited access to the world of entrepreneurship.
3. Studies show that the nation’s minority entrepreneurs own 3.2 million
businesses that generate $495 billion in revenues and employ nearly 4 million workers.
D. Immigrant Entrepreneurs
1. Many are lured to the U.S. by its economic freedom.
2. Come with few assets but lots of drive and dreams.
3. Marty and Helen Shih from Taiwan.
4. Mil Kvitchko and Michael Markov story.
a) In 1992, Mik Kvitchko and Michael Markov, migrated from Russia to the
United States, started a business based on a program they had written to help financial
advisers evaluate the quality of investments. Today, Markov Processes International
generates more than $1 million in sales.
E. Part-time entrepreneurs
1. Permits people to try it with low-risk.
2. 16 million Americans are self-employed part-time.
3. Use it to "test the waters."
4. Charles Manning, Jr. story
a) Charles Manning, Jr. ran a part-time business: accident investigation, a
skill he learned while serving in the Air Force during the Korean War. In 1980, a full-time
business, he worked on such high-profile cases as the Challenger space shuttle and ValuJet
explosions and generates annual revenues of $3.6 million.
H. Copreneurs.
1. Entrepreneurial couples who work together as co-owners of their businesses.
2. Companies co-owned by spouses represent one of the fastest growing business
sectors.
3. Some of the characteristics they rely on include:
a) personalities that mesh.
b) mutual respect.
c) compatible goals.
d) equal partnership.
12 Section I - The Challenge of Entrepreneurship
I. Corporate castoffs
1. As major U.S. companies have "trimmed their ranks," many of these displaced
workers have launched their own companies.
2. 20% of these managers start their own companies.
3. An entrepreneurial offense is the best defense to corporate layoffs.
J. Corporate dropouts
1. Downsizing has diminished employee loyalties.
2. Many are striking out on their own for more opportunity, better income, and
more “job security.”
Entrepreneurs have exhibited persistence, determination, and courage in the face of adversity.
Consider the following entrepreneur’s story.
In 1934, Americans were suffering from the devastating effects of the Great Depression, which
had caused so many businesses to fail and the unemployment rate to peak at 25 percent. Charles
Darrow of Germantown, Pennsylvania had lost his job as a heating equipment salesman in 1930
and had worked at odd jobs to support his family. During this down time, he realized that people
in the United States needed a diversion from the worries of everyday living. He developed a
board game that allowed players to wheel and deal like the real millionaires of the period.
Darrow called the game “Monopoly” and, unable to finance its production and marketing on his
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 13
own, he took it to Parker Brothers, one of the nation’s oldest and best-known game makers.
Parker Brothers reviewed the game but rejected it.
Darrow managed to borrow a small amount of money and with the help of a friend who was a
printer, constructed a few hand-made game sets, which he peddled from store to store.
Wanamaker’s Department Store in Philadelphia placed a consignment order for 5,000 games.
They sold quickly, and Monopoly was soon the rage among residents of the city. The popularity
of the game caused Parker Brothers to reconsider its decision, and in 1935, the company
purchased from Darrow the rights to the game. Demand for the game was so strong that Parker
Brothers could not manufacture enough games sets to meet it even though the company was
turning out 20,000 sets a week. To date, more than 200 million Monopoly sets have been sold
worldwide, making it one of the most popular games ever created. The game has been printed in
26 different languages. Charles Darrow never invented another game, but his legacy lives on
through the game that more than 500 million people have played. Darrow became a millionaire
from the royalties he received on the sales of Monopoly.
B. Managerial incompetence.
1. Management inexperience or poor decision making ability is the chief
problem of the failing enterprise.
2. The owner-leader lacks the knowledge or ability needed.
3. Andrew Kay story.
a) Andrew Kay was a pioneer in the earliest days of the portable computer
with his Kaypro model. Unfortunately, he had no experience in running a high-tech startup,
and, despite the popularity of his computer, Kay made a series of managerial blunders that
ultimately forced the company into bankruptcy.
C. Undercapitalization.
1. Any successful business venture requires proper financial control.
2. Two pitfalls affecting small business's financial health are common:
undercapitalization and poor cash management.
14 Section I - The Challenge of Entrepreneurship
G. Uncontrolled growth.
1. They will outgrow their capital base with every 40 to 50% increase in sales.
2. Ideally the business should expand on retained earnings.
3. Growth also requires structural and other changes.
4. The most important change occurs in managerial expertise.
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 15
H. Poor location.
1. Location is part art and part science.
2. Owners need to investigate before they locate.
a) It's critical in retail.
3. Keys to location.
a) What it costs.
b) What it generates in sales volume.
Seth Goldman and his classmates discussed a case on the beverage industry. One of the topics in
professor Barry Nalebuff’s class that day was which products were missing in the crowded
beverage market. “There were too many sweet drinks and too many bland drinks,” recalls
Goldman. After class, professor Nalebuff and Goldman spent time discussing the types of drinks
that might find a profitable niche in the industry.
16 Section I - The Challenge of Entrepreneurship
A few years later, Goldman e-mailed Nalebuff, asking if he would be interested in discussing the
possibility of building a company that would market a drink aimed at filling this niche in the
beverage market.
Nalebuff had just returned from a trip to India, where he had researched material for a case study
on the tea industry. Goldman, who had spent time teaching in Russia and China, two cultures in
which tea plays an important role, had learned a great deal about tea in his travels. He knew that
tea was the second most popular drink in the world behind water. Nalebuff came up with the
perfect name for the company, Honest Tea. The partners selected five teas for their initial
product line and financed the company with $250,000 of their own money and another $257,000
from family and friends.
Goldman, who is the company’s “TeaEO,” and Nalebuff have since raised an additional $2.7
million in capital. Distribution and marketing and distribution continue to present challenges to
the small company, however. Honest Tea focuses on selling its teas through health food stores,
gourmet food shops, and restaurants, although some supermarket chains.
The company’s marketing efforts have been modest, but Goldman and Nalebuff have relied on a
strong public relations effort to generate publicity for their small business. Offering free
samples, a common marketing ploy for many small companies, has proved to be successful, but
building name recognition that way can be extremely slow. Although some beverage industry
observers wonder if Honest Tea can build enough market share to become a viable company in
the long run, Goldman and Nalebuff are optimistic. “We saw an opportunity that the bigger
companies did not see,” says Goldman. Plus, we have been a nimble company that can adjust to
our customers’ needs.” What’s next for Honest Tea? “We want to be a national brand,” explains
Goldman.
2. On a scale of 1 to 10, how would you rank Honest Tea’s long-term chances of success?
Would you be willing to invest in the company? Explain.
Answer: Student’s answer will vary.
3. What advantages do Honest Tea’s larger competitors have over the small company?
What advantages does Honest Tea have over its larger rivals? How can the company
exploit those advantages?
Answer: Student’s answer will vary.
Chapter Summary
1. Define the role of the entrepreneur in business--in the United States and across the
globe.
Record numbers of people have launched companies over the past decade.
The boom in entrepreneurship is not limited solely to the United States; many
nations across the globe are seeing similar growth in the small business sector. A
variety of competitive, economic, and demographic shifts have created a world in
which "small is beautiful."
Society depends on entrepreneurs to provide the drive and risk-taking
necessary for the business system to supply people with the goods and services
they need.
of their lives; yet, they are not paralyzed by that fear. Successful entrepreneurs have
the attitude that failures are simply stepping stones along the path to success.
10. Explain how small business owners can avoid the major pitfalls of running a business.
There are several general tactics the small business owner can employ to avoid
failure. The entrepreneur should know the business in depth, develop a solid business
plan, manage financial resources effectively, understand financial statements, learn to
manage people effectively, set the business apart from the competition, and keep in
tune with yourself.
Discussion Questions
1. What forces have led to the boom in entrepreneurship in the United States?
Answer - Corporate downsizing flooding the market with corporate cast-offs, an attitude
that small is beautiful, international economic development due to the fall of communism
and the “capitalization” of former state-owned industries, a dream of freedom and
independence, perseverance in achieving results, and the opportunities presented by an
ever-changing environment.
6. Briefly describe the role of the following groups in entrepreneurship: women, minorities,
immigrants, “part-timers,” home-based business owners, family business owners, copreneurs,
corporate castoffs, and corporate dropouts.
Answer -
20 Section I - The Challenge of Entrepreneurship
9. Outline the causes of business failure. Which problems cause most business failures?
Answer - Management incompetence - This one causes the most problems. The manager
lacks the capacity to operate a small business successfully. Lack of experience - Many
owners who start businesses in fields in which they have no prior experience fail. Some
owners lack the right kind of experience. Poor financial control - Undercapitalization -
Starting the business on a "shoestring"--often leads to failure. Lack of strategic planning -
Too many owners neglect it because they think it only benefits large companies.
Uncontrolled growth - Growth is natural and healthy, but unplanned growth can be fatal
to the business. Inappropriate location - Owners who choose a business location without
proper analysis, investigation, and planning often fail. Too often, owners seek "cheap"
sites and locate themselves straight into failure. Lack of inventory control - Although
inventory is typically the largest investment for the owner, inventory control is one of the
most neglected duties. The result is loss through crime and pressure on cash flows from
handling the wrong items. Inability to make the “entrepreneurial transition” - Having
started the business, some entrepreneurs lack the ability to manage it when it gets larger
and fail to turn it over to a different management team.
10. How can the small business owner avoid the common pitfalls that often lead to business
failure?
Answer - Doing the following will help to avoid pitfalls. a) know the business in depth,
b) prepare a business plan, c) manage financial resources, d) understand financial
statements and know how to use them, e) learn to manage people effectively, f) keep in
tune with yourself.
Answer - He/she learn from the mistakes and tries again. He/she takes moderate,
considered risks, has a positive upbeat attitude, and doesn't avoid failure; he/she learn
from it.
13. One entrepreneur says that too many people "don't see that by spending their lives afraid
of failure, they become failures. But when you go out there and risk as I have, you'll have
failures along the way, but eventually the result is great success if you are willing to keep
risking. For every big yes in life, there will be 199 nos." Do you agree? Explain.
Answer - Students' responses will vary.
14. What advice would you offer an entrepreneurial friend who has just suffered a business
failure?
Answer - Students' responses will vary but the advice should include a reality check,
long hours, high failure rate, and a dose of the positive, persist, learn, don't give up.
15. Noting the growing trend among collegiate entrepreneurs launching businesses while still in
school, one educator says, “A student whose main activity on campus is running a business is
missing the basic reason for being here, which is to get an education.” Do you agree?
Explain.
Student’s responses will vary.
3. Select one of the categories under the section "The Diversity of Entrepreneurship" in this
chapter and research it in more detail. Find examples of the entrepreneurial profile. Prepare a
brief report for your class.
4. Interview a local banker who has experience lending to small companies. What factors
does he or she believe are important to a small company's success? What factors has he or
she seen to cause business failures? What does the lender want to see in a business start-up
before agreeing to lend any money?