A Definition of Entrepreneurship The concept of entrepreneurship has a wide range of meanings.

On the one extreme an entrepreneur is a person of very high aptitude who pioneers change, possessing characteristics found in only a very small fraction of the population. On the other extreme of definitions, anyone who wants to work for himself or herself is considered to be an entrepreneur. The word entrepreneur originates from the French word, entreprendre, which means "to undertake." In a business context, it means to start a business. The MerriamWebster Dictionary presents the definition of an entrepreneur as one who organizes, manages, and assumes the risks of a business or enterprise. Schumpeter's View of Entrepreneurship Austrian economist Joseph Schumpeter 's definition of entrepreneurship placed an emphasis on innovation, such as: new products new production methods new markets new forms of organization Wealth is created when such innovation results in new demand. From this viewpoint, one can define the function of the entrepreneur as one of combining various input factors in an innovative manner to generate value to the customer with the hope that this value will exceed the cost of the input factors, thus generating superior returns that result in the creation of wealth. Entrepreneurship vs. Small Business Many people use the terms "entrepreneur" and "small business owner" synonymously. While they may have much in common, there are significant differences between the entrepreneurial venture and the small business. Entrepreneurial ventures differ from small businesses in these ways: 1. Amount of wealth creation - rather than simply generating an income stream that replaces traditional employment, a successful entrepreneurial venture creates substantial wealth, typically in excess of several million dollars of profit. 2. Speed of wealth creation - while a successful small business can generate several million dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for example, within 5 years. 3. Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive of sure profits many entrepreneurs would be pursuing the idea and the opportunity no longer would exist. 4. Innovation - entrepreneurship often involves substantial innovation beyond what a small business might exhibit. This innovation gives the venture the competitive advantage that results in wealth creation. The innovation may be in the product or service itself, or in the business processes used to deliver it.

The Business Model To extract value from an innovation, a start-up (or any firm for that matter) needs an appropriate business model. Business models convert new technology to economic value.

For some start-ups, familiar business models cannot be applied, so a new model must be devised. Not only is the business model important, in some cases the innovation rests not in the product or service but in the business model itself. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom present a basic framework describing the elements of a business model. Given the complexities of products, markets, and the environment in which the firm operates, very few individuals, if any, fully understand the organization's tasks in their entirety. The technical experts know their domain and the business experts know theirs. The business model serves to connect these two domains as shown in the following diagram:

Technical Inputs

Business Model

Economical Outputs

A business model draws on a multitude of business subjects, including economics, entrepreneurship, finance, marketing, operations, and strategy. The business model itself is an important determinant of the profits to be made from an innovation. A mediocre innovation with a great business model may be more profitable than a great innovation with a mediocre business model. In their research, Chesbrough and Rosenbloom searched literature from both the academic and the business press and identified some common themes. They list the following six components of the business model: 1. Value proposition - a description the customer problem, the product that addresses the problem, and the value of the product from the customer's perspective. 2. Market segment - the group of customers to target, recognizing that different market segments have different needs. Sometimes the potential of an innovation is unlocked only when a different market segment is targeted. 3. Value chain structure - the firm's position and activities in the value chain and how the firm will capture part of the value that it creates in the chain. 4. Revenue generation and margins - how revenue is generated (sales, leasing, subscription, support, etc.), the cost structure, and target profit margins. 5. Position in value network - identification of competitors, complementors, and any network effects that can be utilized to deliver more value to the customer. 6. Competitive strategy - how the company will attempt to develop a sustainable competitive advantage, for example, by means of a cost, differentiation, or niche strategy. Business Model vs. Strategy Chesbrough and Rosenbloom contrast the concept of the business model to that of strategy, identifying the following three differences:

1. Creating value vs. capturing value - the business model focus is on value creation. While the business model also addresses how that value will be captured by the firm, strategy goes further by focusing on building a sustainable competitive advantage. 2. Business value vs. shareholder value - the business model is an architecture for converting innovation to economic value for the business. However, the business model does not focus on delivering that business value to the shareholder. For example, financing methods are not considered by the business model but nonetheless impact shareholder value. 3. Assumed knowledge levels - the business model assumes a limited environmental knowledge, whereas strategy depends on a more complex analysis that requires more certainty in the knowledge of the environment. Business Model for the Xerox Copier Chesbrough and Rosenbloom illustrate the importance of the business model with a case study of Xerox Corporation's early days in the copy machine business with its Xerox Model 914 copier. (Before changing its name to Xerox Corporation, the company was known as the Haloid Company and then Haloid Xerox Inc.) The Model 914 used the relatively new electrophotography process, which is a dry process that avoids the use of wet chemicals. In seeking potential marketing partners, Haloid repeatedly was turned down by the likes of Kodak, GE, and IBM, who had concluded that there was no future in the technology as seen through the lens of the then-prevalent business model. While the technology was superior to earlier copy methods, the cost of the machine was six to seven times more expensive than alternative technologies. The model of selling the equipment below cost and making up the difference by large margins in the sale of supplies was not viable because the cost of the supplies was about the same as that of the alternatives, so there was little room to maneuver. Xerox then decided to market the new product itself and developed a new business model to do so. The new model leased the equipment to the customer at a relatively low cost and then charged a per copy fee for copies in excess of 2000 copies per month. At that time, the average business copier produced an average of only 15-20 copies per day. For this model to be profitable to Xerox, the use of copies would have to increase substantially. Fortunately for Xerox, the quality and convenience of the new copy technology proved itself and companies began to make thousands of copies per day. As a result, Xerox sustained a compound annual growth rate of 41% over a 12 year period. Without this business model, Xerox might not have been successful in commercializing the innovation.

The Entrepreneurial Advantage Chesbrough and Rosenbloom observe that a successful business model such as that of Xerox tends to build momentum and the company becomes confined to its successful model. However, new technologies often require new business models.

Because start-up companies are free to choose or develop a new business model, in this regard start-ups have an advantage over more established firms. In addition to the risk incurred in the technological and the economic domains, an unproven business model adds additional risk, and entrepreneurial ventures usually are more prepared to accept this risk than would be a large, well-entrenched firm. In fact, many venture capitalists see themselves as investing in a business model. Consequently, it often is the VC that pushes for a change in the business model when it becomes apparent that the original model is not working. SAMPLE BUSINESS PLAN OUTLINE Title Page Name of company, date, contact information, etc. Table of Contents Executive Summary 1. Business Concept 2. Company 3. Market Potential 4. Management Team 5. Distinct Competencies 6. Required Funding and its Use 7. Exit Strategy Main Sections I. Company Description Mission Statement Summary of Activity to Date Current Stage of Development Competencies Product or Service Description Benefits to customer Differences from current offerings Objectives Keys to Success Location and Facilities

II. Industry Analysis Entry Barriers Supply and Distribution Technological Factors Seasonality Economic Influences Regulatory Issues III. Market Analysis Definition of Overall Market

Market Size and Growth Market Trends Market Segments Targeted Segments Customer Characteristics Customer Needs Purchasing Decision Process Product Positioning

IV. Competition Profiles of Primary Competitors Competitors' Products/Services & Market Share Competitive Evaluation of Product Distinct Competitive Advantage Competitive Weaknesses Future Competitors V. Marketing and Sales Products Offered Pricing Distribution Promotion Advertising and Publicity Trade Shows Partnerships Discounts and Incentives Sales Force Sales Forecasts VI. Operations Product Development Development Team Development Costs Development Risks Manufacturing (if applicable) Production Processes Production Equipment Quality Assurance Administration Key Suppliers Product / Service Delivery Customer Service and Support Human Resource Plan Facilities VII. Management and Organization Management Team Open Positions Board of Directors Key Personnel Organizational Chart

VIII. Capitalization and Structure Legal Structure of Company Present Equity Positions Deal Structure Exit Strategy IX. Development and Milestones Time may be specified on a relative scale rather than specific calendar dates. Milestones may include some or all of the following: Financing Commitments Product Development Milestones Prototype Testing Launch Signing of Significant Contracts Achievment of Break-even Performance Expansion Additional Funding Any other significant milestones X. Risks and Contingencies Some common risks include: Increased competition Loss of a key employee Suppliers' failure to meet deadlines Regulatory changes Change in business conditions XI. Financial Projections Assumptions (Start date, commissions, tax rates, average inventory, sales forecasts, etc.) Financial Statements (Balance Sheet, Income Statement, Cash Flow Statement) Break Even Analysis Key Ratio Projections (quick ratio, current ratio, D/E, D/A, ROE, ROA, working capital) Financial Resources Financial Strategy XII. Summary and Conclusions Appendices May include: Management Resumes Competitive Analysis Sales Projections Any other supporting documents ATTRACTING STAKEHOLDERS

A new business requires resources such as funds for R&D, equipment, marketing, and inventory. These funds are obtained by attracting stakeholders. Financial stakeholders are most at risk - these include banks, bond holders, investors, and venture capital firms. However, employees, customers, and suppliers of a business also are at risk. Employees may not receive some of their pay if the business fails, and they may have given up lucrative positions to which they no longer can return. Customers may find that they are stuck with a non-supported product, and suppliers may lose the opportunity to recoup their development costs or to receive their accounts receivable. Because of the risk of failure, attracting stakeholders is more difficult for a new venture than for an established, successful company. Minimizing Downside Exposure One way to make a new venture more attractive to potential stakeholders is to minimize their downside exposure to the fullest extent possible. For example, nontransferable R&D costs can be reduced by using off-the-shelf technology wherever possible. Investment in capital equipment can be made somewhat reversible by using more general machines that can be used for other purposes, thereby enhancing their liquidation value. The initial marketing expenditures can be reduced by marketing to people who are in a position to influence the opinions of many other decisions makers, thus reducing promotion cost. Employee risk can be reduced by using standard tools of the trade so that they easily can be out-placed, and by choosing a location that has many opportunities for the employees should they need to find another job. Customer risk can be reduced by designing a product to use standard components and to be compatible with other products. Taking such measures to reduce stakeholder risk may increase variable costs and compromise the product - this is a tradeoff that must be considered when making such decisions. Finding Risk-Tolerant Stakeholders Stakeholders must be found who are willing and able to accept the downside risk. Such stakeholders tend to be diversified, have experience with start-ups, have excess capacity, and be risk-seeking. Diversified financiers are those who invest in multiple businesses. Diversified distributors are those who carry many other products. Diversified customers are those who use multiple suppliers on whom they can fall back if necessary. Those stakeholders who have experience with start-ups are more comfortable with the downside and better understand the potential rewards. Stakeholders with excess capacity incur less opportunity cost and therefore have less risk from participating in the start-up. A engineer who has time in the evening or a manufacturing firm that has upgraded its production capacity are examples of stakeholders with excess capacity. Finally, risk seekers who enjoy the uncertainty associated with start-ups are potentially good candidates for stakeholders; however, if a start-up portrays too strong of a risk-taking image, more conservative stakeholders will be scared away. Selling Potential Stakeholders on the Venture Once potential stakeholders are identified, they must be sold on the venture. To do this, the entrepreneur must have faith in the venture and show enthusiasm for it. A record of success helps, but the main thing is that he has honored past promises and has not abandoned a venture in mid-stream when it encountered difficulties. A common problem for start-ups is securing the commitment from stakeholders who are waiting for other stakeholders to sign on first, or "ham and egging". The ideal way to do this is to convince each of the stakeholders simultaneously that the others have signed-on or are very close to signing on. An alternative method is to get a small commitment from one stakeholder and use that to get a small commitment from another and so forth. It helps to have a "bell cow" - someone who has the reputation of being a leader with foresight. When acquiring the commitment of stakeholders,

one needs to have a schedule, know what the start-up needs, be able to anticipate and handle objections, and deal with withdrawals after sign-on. A schedule is important so that the entrepreneur can measure whether the stakeholders really have committed to the venture as evidenced by the intermediate milestones. The entrepreneur needs to understand the actual needs of the venture in order to negotiate for that and only that. Potential stakeholders may voice objections and concerns before committing. Many of these can be dealt with by openly discussing issues such as the "fume date" (the date at which the venture is to run out of cash) and by presenting well-thought-out contingency plans. Maintaining Stakeholder Commitment There may be cases in which a stakeholder wants to back-out of a commitment. For example, a talented employee who signed-on to the venture may have a counteroffer to remain with his employer. The entrepreneur constantly must follow up with the stakeholders to prevent such problems and to deal with them when they occur.