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Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business

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.

B. Increase in launch of new business:


1. Due to new technological developments, it is possible for companies to
accomplish more with fewer people. As a result, people who once saw launching
a business as being too risky now see it as the ideal way to create their own job
security.

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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).

II. What is an entrepreneur?


A. Definition
1. An entrepreneur is one who creates a new business in the face of risk and
uncertainty for the purpose of achieving profit and growth opportunities and assembles the
necessary resources to capitalize on those opportunities.

IN THE FOOTSTEPS OF AN ENTREPRENEUR – From the Ice Age to Outer Space


Two characteristics common to entrepreneurs are creativity and an eye for opportunity.

An Opportunity from the Ice Age.


Ronald Stamp has an idea about how to use the 750 or so icebergs that break off from glaciers
each year and drift south past Greenland into the Atlantic. Stamp, a former fish wholesaler, is
lassoing icebergs and melting them down to make spring water! Recognizing the marketing
potential of water made from glacial ice, Stamp has an eye on tapping into the $30 billion-a-year
bottled water business.

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.
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a) They prefer to be in control of their resources and to use those resources to


achieve self-determined goals.
2. Preference for moderate risk.
a) Entrepreneurs are not wild risk-takers, but are instead calculating risk-
takers.
3. Confidence in their ability to succeed.
a) They need to be optimistic about the chances for success.
4. Desire for immediate feedback.
a) Entrepreneurs like to know how they are doing and are constantly looking
for reinforcement.
5. High level of energy.
a) Entrepreneurs are more energetic than the average person. Typically, they
work long hours, often 60 to 80 hours a week.
6. Future orientation.
a) Entrepreneurs tend to dream big and then formulate plans to transfer those
dreams into reality.
7. Skill at organizing.
a) Entrepreneurs know how to put the right people and resources together to
accomplish a task.
8. Value achievement over money.
a) Achievements seems to be the primary motivating force behind
entrepreneurs - money is simply a way off keeping score off accomplishments.

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

a) Optimizers (21% of all entrepreneurs) are the second largest category.


b) The benefits of entrepreneurship are most important to them; they enjoy
the freedom and flexibility of owning a business and would not be willing to work for
someone else.
c) They want their companies to grow, but their focus is on profits rather
than on revenues.
d) These business owners are highly knowledgeable about financial issues
and use technology to keep costs down and productivity up.
e) They worry less than other business owners because they see themselves
as maintaining control over their businesses.
f) They also have learned the secrets of balancing their home and business
lives.
3. Hard Workers.
a) Hard workers make up 20% of the entrepreneurial population.
b) They love their work and are more likely than any other group to put in
extra hours to achieve the targets.
c) They tend to be detail-oriented and are the most growth-oriented
entrepreneurial group.
d) They are financially aggressive and exercise broad control over the details
of running their businesses.
e) Hard workers typically have long-term business plans and stick to them.
4. Jugglers.
a) Jugglers also make up 20 percent of the entrepreneurial population.
b) They have a difficult time delegating authority and responsibility.
c) They prefer to do things themselves to make sure everything meets their
high standards.
d) They are highly energetic people who are good at handling multiple tasks
simultaneously.
e) They readily embrace technology in their companies and are always
looking for ways to improve their businesses.
f) Jugglers feel pressure to maintain positive cash flow in their companies.
5. Sustainers.
a) Sustainers comprise 15 percent of all entrepreneurs
b) These entrepreneurs are more likely to have inherited or bought their
companies.
c) They are the least comfortable with technology and prefer to put in more
time than to figure out how to apply technology to solve a particular problem.
d) Sustainers are the most conservative group and do not strive to achieve
significant levels of growth.
e) Maintaining a good balance between business and home life is important
to them.

III. Benefits and opportunities of small business ownership:


A. Opportunity to gain control over your own destiny
1. Owning a business.
2. Rewards of knowing you are the driving forces behind their businesses.
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B. Opportunity to make a difference


1. Opportunity to do what is important to you.
2. Example of Josh Kanuer.
a) “I have no smaller goal than to have a positive impact on our planet and to
create a positive future for my children and the world.”

C. Opportunity to reach your full potential


1. Escape from boring and unchallenging work.
2. Entrepreneurship is a vehicle for self-expression.

D. Opportunity to reap unlimited profits


1. Money is not the primary motivator, but owning your own business is a great
way to create wealth.
2. Typical American millionaire is first-generation wealthy, owns a small
business and works 45-55 hours a week.
3. Example of John Schnatter.
a) In 1984, Schnatter sold his car, bought used restaurant equipment, and
began selling pizzas. Now, he owns 2,800 stores (most of them franchises) in 49 states and
10 foreign countries, generating sales in excess of $2 billion a year. His net worth is more
than $500 million.

IN THE FOOTSTEPS OF AN ENTREPRENEUR…


The Inca Girl

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.

E. Opportunity to contribute to society and be recognized for your efforts


1. Often small business owners are among the most trusted and respected
members of their communities.
2. Entrepreneurs enjoy the recognition they get from customers for doing a job
well.

F. Opportunity to do what you enjoy doing


1. Their work is not really work; it's their avocation turned into a vocation.
2. Mike Manclark story.
a) Mike Manclark transformed his passion for airplanes and flying into a
lucrative business. In 1984 at age 19, with borrowed $3,000, he launched Leading Edge
Aviation Services. Leading Edge now generates more than $26 million in annual sales. “I
don’t do this for the money,” he says. “I do it for the love of airplanes.”

IV. Potential drawbacks of entrepreneurship:


A. Uncertainty of income
1. The regularity of income from working for someone is gone.
2. "The entrepreneur is the last one to be paid."

B. Risk of losing your entire invested capital


1. 34% fail within 2 years.
2. 50% shut down within 4 years.
3. 60% fold within 6 years.
4. Consider the risk-reward trade-off.
a) What is the worst thing that could happen if my business fails?
b) How likely is it that the worst to happen?
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c) What can I do to lower the risk that my business will fail?


d) What is my contingency plan for coping if my business fails?

C. Long hours and hard work


1. 10- to 12-hour days and six- or seven-day workweeks with no paid vacations.
2. Owners experience intense, draining workdays.

D. Lower quality of life until the business gets established


1. The workload can take a toll on the entrepreneur’s personal life and family.
2. Most launch their business when they are between 25 and 34, just as their
families are starting.
3. Figure 1.2.

E. High levels of stress


1. Running your own business is highly stressful.
2. Failure can mean total financial ruin.

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.

V. Why the boom? The Fuel Feeding The Entrepreneurial Fire


A. Entrepreneurs as heroes
1. Americans have very positive attitudes towards entrepreneurs.

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.

C. Demographic and economic factors


1. Most start their businesses between ages 25 to 44.

D. Shift to a service economy


1. By 2000, the service sector will produce 90 % of the jobs and 80 %of the
GDP in the U.S.
2. The booming service sector has provided entrepreneurs with many business
opportunities.

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.

G. The World Wide Web (WW)


1. Electronic commerce will have grown from $518 million in 1996 and $6.8
billion in 2004.
2. Myriam Zaoui and Eric Malk story
a) Myriam Zaoui and Eric Malka, co-founders of The Art of Shaving, a chain
of retail stores selling shaving products, recently invested $40,000 and eight months
developing a Web for their business which attracted new customers and generated new sales.
Web sales now account for 15 percent of The Art of Shaving’s sales.

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.

VI. The Cultural Diversity of Entrepreneurship


A. Young Entrepreneurs
1. Generation X, people born between 1965 and 1980, is the most
entrepreneurial generation in history.
2. Members of this generation are responsible for 70 percent of all business start-
ups!
3. Recent surveys have found that 60 percent of 18-to 29-year-olds say they hope
to launch their own businesses.
4. “Generation X” might be more appropriately called “Generation E.”

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.

F. Home-based business owners


1. 53% of all businesses are home-based, but about 80 percent of them are very
small with no employees.
2. Study reported more than 55,000 home-based businesses generating sales of more
than $1 million per year.
3. The biggest advantage is the cost savings of not having to lease or buy an external
location.
4. They also enjoy the benefits of flexible work and lifestyles.
5. Studies suggest that the success rate for home-based businesses is high.
6. Dorn Kennison Story
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 11

a) Don Kennison launched his business, DMK Productions, a company that


creates 3-D computer animations and sound effects for a variety of
applications, from his kitchen table. His first step was to create a business
plan, and then he began calling on prospective clients. Although Kennison’s
business has experienced tremendous growth, he still runs the company from
his home in Simi Valley, California.
7. Table 1.2 - 18 guidelines home-based entrepreneurs should follow.
Managing a Successful Home-Based Business.
a) Do your homework
b) Find out what your zoning restrictions are
c) Choose the most efficient location for your office
d) Focus your home-based business idea
e) Discuss your business rules with your family
f) Select an appropriate business name
g) Buy the right equipment
h) Dress appropriately
i) Learn to deal with distractions
j) Realize that your phone can be your best friend ... or your worst enemy
k) Be firm with friends and neighbors
l) Take advantage of tax breaks
m) Make sure you have adequate insurance coverage
n) Understand the special circumstances under which you can hire outside
employees
o) Be prepared if your business requires clients to come to your home
p) Get a post office box
q) Network, network, network
r) Be proud of your home-based business

G. Family business owners


1. Of the 25.5 million businesses in the United States, 90% are family-owned
and managed.
2. These companies account for 60 % of total employment in the United States
and generate more than 50% of the U.S. Gross Domestic Product (GDP).
3. 37% of the Fortune 500 companies are family businesses.
4. Only 33% of family businesses survive to the second generation; just 12% make it
to the third generation; and only 3% survive to the fourth generation and beyond.

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

e) complementary business skills.


f) open communication.
g) clear division of roles and authority.
h) ability to encourage each other.
i) separate work spaces.
j) boundaries between work and personal life.
k) a sense of humor.
l) may not work with every couple.

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.”

VII. The Contributions of Small Business


A. Introduction
1. 25.5 million businesses, 98.5% of all businesses in the U.S. would qualify as
small businesses.
2. Small business employs more than 52% of the private sector work force.
3. Virtually all job growth in 1990s came from small business, creating 75.8% of
new jobs.
4. Small companies bear the heaviest load of training new workers.
5. Small businesses produce 51% of the GDP and 47% of business sales.
6. They also generate 20% more innovations per employee than large
companies.
7. See Figure 1.7.

IN THE FOOTSTEPS OF AN ENTREPRENEUR…


Monopoly’s Inventor

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.

1. Explain how Charles Darrow exhibits the "entrepreneurial spirit."


Answer: Student’s answer may vary. Some common “entrepreneurial spirit”
could be: commitment, persistent, and believing himself and his product.
2. Is Darrow’s story of continuing to try in the face of failure typical of successful
entrepreneurs? Explain.
Answer: Student’s answer may vary. A common explanation is: wanting to
make a difference.

VIII. The Ten Deadly Mistakes of Entrepreneurship


A. Small businesses have a much higher failure rate than larger businesses.
1. 60% will fail in six years.
2. Causes of small business failure
a) limited resources, inexperienced management, and lack of financial
stability.

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

3. Entrepreneurs tend to be overly optimistic and often underestimate the financial


requirements of launching a business or the amount of time required for the
company to become self-sustaining.

D. Poor Cash Management.


1. Insufficient cash flow due to poor cash management is a common cause of
business failure.
2. Maintaining adequate cash flow to pay bills in a timely fashion is a constant
challenge for small companies.
3. Poor credit and collection practices on accounts receivable, sloppy accounts
payable practices that exert undue pressure on a company’s cash balance, and
uncontrolled spending are common to many small business bankruptcies.
4. Boo.com story.
a) The founders of Boo.com, a highly publicized Internet clothing retailer, failed
to establish adequate financial controls in the business, and it ultimately
caused the company to run out of cash and fold. Although the company’s
sales reached $1.1 million per month, its expenses were running ten times that
amount! The company’s cash drained away, and by the time the company
went into bankruptcy.

E. Lack of Strategic Management.


1. Too many small business managers neglect the process of strategic management.
2. Failure to plan, however, usually results in failure to survive.
3. Clearly defined strategy is necessary for creating and maintaining a competitive
edge.
4. Building a strategic plan forces an entrepreneur to assess realistically the
proposed business's potential.

F. Weak Marketing Effort.


1. Sometimes entrepreneurs believe that if they “build it,” customers automatically
“will come.”
2. Stephen Mason and Alan Davis story.
a) Stephen Mason and Alan Davis are cofounders of Catamount Brewery, one of
New England’s first microbreweries. Early on, customers, intrigued by the
romance and mystique of microbreweries, flocked to Catamount’s unique
beers. Within six years, Catamount’s production had climbed from 3,500
barrels a year to 12,000 barrels a year. Unfortunately, its marketing efforts
did not keep pace. Sales slipped as customers drifted away, and the company
could not generate enough cash to repay the debt it took on to expand its plant,
forcing it into bankruptcy.

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.

I. Lack of Inventory Control


1. Inventory control is one of the most neglected areas in small business.
2. Insufficient inventory levels result in shortages and stockouts causing customers
to become disillusioned and not return.
3. Has too much inventory or has too much of the wrong type of inventory.

J. Inability to Make the “Entrepreneurial Transition.”


1. Many businesses fail when their founders are unable to make the transition from
entrepreneur to manager and are unwilling to bring in a professional management
team.
2. Growth requires entrepreneurs to delegate authority.
3. They should avoid micromanaging.
4. Joe Kraus story.
a) Joe Kraus launched the Internet portal Excite (now Excite at Home) and
became Excite’s first chief executive officer. After the company grew, he and
his co founders decided that Excite needed experienced, professional
management to guide its rapid growth. Hiring an experienced manger proved
to be a wise move for Excite and for Kraus.

IX. Putting Failure into Perspective


1. It is a natural part of the process. The only way to not fail is to not do
anything.
2. Learn from failures and be more successful the next time. It's not mistake
avoidance but learning from mistakes that counts.
3. Entrepreneurship requires persistence and resilience.

IN THE FOOTSTEPS OF AN ENTREPRENEUR…


Tea Time

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.

1. Describe the opportunities and the threats facing Honest Tea.


Answer: Student’s answer will vary.

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.

X. How to avoid the pitfalls.


A. Know your business in depth
1. Get the best education and experience before you start.
2. Example of Stephanie Ann.
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 17

B. Prepare A Business Plan.


1. Planning replaces "I think" with "I know."
2. Most entrepreneurs don't have a solid plan.
3. Entrepreneurs attempt to build businesses on faulty assumptions.

C. Manage Financial Resources.


1. Develop a practical information system and use it to make decisions.
2. To have adequate startup capital.
3. Estimate capital needed then double it.
4. Cash is your most valuable resource.

D. Understand Financial Statements.


1. These documents are reliable indicators of the small business's health. Know
them.
2. Know the financial danger signs to look for.

E. Learn To Manage People Effectively.


1. Your hires will determine where your company will go.
2. Share information.

F. Set your business apart from the competition


1. Differentiate your company and products.
2. Convince your customers that you are different from competitors.
3. For small companies, that basis often is customer service, convenience, speed,
quality, or whatever else is important to attracting and keeping happy customers.

G. Keep in tune with yourself.


1. Requires lots of energy and enthusiasm.
2. Manage yourself.
3. Keep a positive attitude.
4. Keep your passion.

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.

2. Describe the entrepreneurial profile.


18 Section I - The Challenge of Entrepreneurship

 Entrepreneurs have some common characteristics, including a desire for


responsibility, a preference for moderate risk, confidence in their ability to
succeed, a desire for immediate feedback, a high energy level, a future
orientation, skill at organizing, and a value of achievement over money. In a
phrase, they are high achievers.

3. Describe the benefits and opportunities of owning a small business.


 Driven by these personal characteristics, entrepreneurs establish and manage
small businesses to gain control over their lives, become self-fulfilled, reap
unlimited profits, contribute to society, and do what they enjoy doing.

4. Describe the potential drawbacks of owning a small business.


 Small business ownership has some potential drawbacks. There are no
guarantees that the business will make a profit or even survive. The time and
energy required to manage a new business may have dire effects on the owner and
family members.

5. Explain the forces that are driving the growth in entrepreneurship.


 Several factors are driving the boom in entrepreneurship, including the
portrayal of entrepreneurs as heroes, better entrepreneurial education, economic
and demographic factors, a shift to a service economy, technological
advancements, more-independent lifestyles, and increased international
opportunities.

6. Discuss the role of diversity in small business and entrepreneurship.


 Several groups are leading the nation's drive toward entrepreneurship: women,
minorities, immigrants, "part-timers," home-based business owners, family
business owners, copreneurs, corporate castoffs, and corporate dropouts.

7. Describe the contributions small businesses make to the U.S. economy.


 The small business sector's contributions are many. They make up 99 percent
of all businesses, employ 53 percent of the private sector workforce, create 75.8%
of the new jobs in the economy, produce 51 percent of the country's private Gross
Domestic Product (GDP), and account for 47 percent of business sales.

8. Explain the reasons small businesses fail.


 The failure rate for small businesses is higher than for big businesses, and profits
fluctuate with general economic conditions. SBA statistics show that 60 percent of
new businesses will have failed within six years. The primary cause of business
failure is incompetent management. Other reasons include poor financial control,
failure to plan, inappropriate location, lack of inventory control, improper managerial
attitudes, and inability to make the "entrepreneurial transition."

9. Put business failure into the proper perspective.


 Because they are building businesses in an environment filled with uncertainty
and shaped by rapid change, entrepreneurs recognize that failure is likely to be a part
Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 19

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.

2. What is an entrepreneur? Give a brief description of the entrepreneurial profile.


Answer - One who creates a new business in the face of risk and uncertainty for the
purpose of achieving profit and growth by identifying opportunities and assembling the
necessary resources to capitalize on them. Profile - a) desire for responsibility, b)
preference for moderate risk, c) confidence in personal success, d) desire for immediate
feedback, e) high level of energy, f) possess a future orientation, g) skill in organization,
h) money is a great way to keep score but it is not as important as achievement.

3. Inc. magazine claims, “Entrepreneurship is more mundane than it’s sometimes


portrayed . . . you don’t need to be a person of mythical proportions to be very, very
successful in building a company.” Do you agree? Explain.
Answer - will vary according to the student.

4. What are the major benefits of business ownership?


Answer - a) opportunity to gain control over your destiny, b) opportunity to make a
difference, c) opportunity to reach your full potential, d) opportunity to reap unlimited
profits, e) opportunity to make a contribution to society and receive recognition for your
efforts.

5. Which of the potential drawbacks to business ownership are most critical?


Answer - Student's responses will vary but should cover the following drawbacks: a)
uncertainty of income, b) risk of losing invested capital, c) long hours and hard work, d)
lower quality of life until the business gets established, d) complete responsibility.

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

7. What contributions do small businesses make to our economy?


Answer - There is no set definition of a small business. SBA criteria vary by industry,
see page 36. 98% of U.S. businesses could be considered small. They’ve contributed
almost all of the recent job growth, employ over 50% of the private workforce, and
contribute 48% of our GNP and 42% of all business sales.

8. Describe the small business failure rate.


Answer - The failure rate for small businesses is higher than for big businesses. Based on
data released from SBA, 60 percent of new businesses fail within six years. The primary
reason is incompetent management. Other reasons are poor financial control, failure to plan,
inappropriate location, lack of inventory control, improper managerial attitudes, and inability
to make the "entrepreneurial transition."

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.

11. Why is it important to study the small business failure rate?


Answer - It provides a realistic picture for potential entrepreneurs to consider prior to
their launching of their businesses. It provides understanding of why businesses fail and
offers insight into ways to prevent it.

12. Explain the typical entrepreneur's attitude toward failure.


Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 21

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.

Step into the Real World


1. Choose an entrepreneur in your community and interview him or her. What's the "story"
behind the business? What advantages and disadvantages does the owner see in owning a
business? What advice would he or she offer to someone considering launching a business?

2. Search through recent business publications (especially those focusing on small


companies such as Inc., Entrepreneur, Business Start-Ups, Nation's Business, or Your
Company) and find an example of an entrepreneur--past or present--who exhibits the
entrepreneurial spirit of striving for success in the face of failure as Gail Borden did. Prepare
a brief report for your class.

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?