Chapter 1

Introduction to
Entrepreneurship
Bruce R. Barringer
R. Duane Ireland

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

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Introduction to Entrepreneurship

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

According to the 2010 GEM

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

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Indications of Increased Interest

in Entrepreneurship
Books
Amazon.com lists over 35,600 books dealing with
entrepreneurship and 62,700 focused on small business.

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

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

Venture Capitalist (Fred Wilson)

Entrepreneurship is the art of turning an idea into a
business.

Explanation of What Entrepreneurs Do

Entrepreneurs assemble and then integrate all the resources
needed the money, the people, the business model, the
strategy to transform an invention or an idea into a viable
business.
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Corporate Entrepreneurship
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Corporate Entrepreneurship
Is the conceptualization of entrepreneurship at the firm
level.
All firms fall along a conceptual continuum that ranges
from highly conservative to highly entrepreneurial.
The position of a firm on this continuum is referred to as its
entrepreneurial intensity.

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Corporate Entrepreneurship
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Entrepreneurial Firms
Proactive
Innovative
Risk taking

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

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Why Become an Entrepreneur?

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

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Characteristics of Successful Entrepreneurs

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Four Primary Characteristics

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Characteristics of Successful Entrepreneurs

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Passion for the Business

The number one characteristic shared by successful
entrepreneurs is a passion for the business.
This passion typically stems from the entrepreneurs belief
that the business will positively influence peoples lives.

Product/Customer Focus
A second defining characteristic of successful
entrepreneurs is a product/customer focus.
An entrepreneurs keen focus on products and customers
typically stems from the fact that most entrepreneurs are, at
heart, craftspeople.
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Characteristics of Successful Entrepreneurs

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Tenacity Despite Failure

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

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

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What Went Wrong? - How a lack of

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

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What Went Wrong? - How a lack of

passion and too few customers can kill a
business.
YouCastr started as a virtual sports bar.
Their business model called for the firm to take a commission
on the sales its site generated.
Reasons why YouCastr failed:
Company ran out of money
Market was not there
Assumed people were willing to pay for audio and video sporting
events
Lack of passion pertaining to sports and broadcasting
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Common Myths About Entrepreneurs

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Myth 1: Entrepreneurs Are Born, Not Made

This myth is based on the mistaken belief that some people
are genetically predisposed to be entrepreneurs.
The consensus of many studies is that no one is born to
be an entrepreneur; everyone has the potential to become
one.
Whether someone does or doesnt become an entrepreneur
is a function of their environment, life experiences, and
personal choices.

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Common Myths About Entrepreneurs

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Although no one is born to be an entrepreneur, there are common traits and
characteristics of successful entrepreneurs
A moderate risk taker

Optimistic disposition

A networker

Persuasive

Achievement motivated

Promoter

Alert to opportunities
Creative

Resource
assembler/leverager

Decisive

Self-confident

Energetic
Has a strong work ethic
Lengthy attention span

Self-starter
Tenacious
Tolerant of ambiguity
Visionary

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Common Myths About Entrepreneurs

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Myth 2: Entrepreneurs Are Gamblers

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

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Common Myths About Entrepreneurs

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Myth 3: Entrepreneurs Are Motivated Primarily by

Money
While it is nave to think that entrepreneurs dont seek
financial rewards, money is rarely the reason entrepreneurs
start new firms.
In fact, some entrepreneurs warn that the pursuit of money
can be distracting.

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Common Myths About Entrepreneurs

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Myth 4: Entrepreneurs Should Be Young and

Energetic
Entrepreneurial activity is fairly easily spread out over age
ranges.
While it is important to be energetic, investors often cite
the strength of the entrepreneur as their most important
criteria in making investment decisions.
What makes an entrepreneur strong in the eyes of an investor is
experience, maturity, a solid reputation, and a track record of
success.
These criteria favor older rather than younger entrepreneurs.
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Types of Start-Up Firms

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Changing Demographics of Entrepreneurs

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

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

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

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Changing Demographics of Entrepreneurs

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

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Economic Impact of Entrepreneurial Firms

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

Job Creation
Small businesses are the creators of most new jobs in the
U.S., and employ half of all private sector employees.
According to a Kauffman Foundation survey, 92% of
Americans say entrepreneurs are critically important to job
creation.
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Entrepreneurial Firms Impact on Society

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

Impact on Larger Firms

Many entrepreneurial firms have built their entire business
models around producing products and services that help
larger firms become more efficient and effective.
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The Entrepreneurial Process

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

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Sources of Equity Funding

Venture Capital

Business Angels

Initial Public
Offerings

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

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Business Angels
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Business Angels (continued)

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

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

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

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Venture Capital
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Venture Capital (continued)

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

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Initial Public Offering

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Initial Public Offering

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

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Reasons that Motivate Firms to Go Public

Reason 1

Reason 2

Is a way to raise equity

capital to fund current
and future operations.

Raises a firms public

profile, making it easier
to attract high-quality
customers and business
partners.

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Initial Public Offering

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Reasons that Motivate Firms to Go Public

Reason 3

Reason 4

Is a liquidity event that

provides a means for a
companys investors to
recoup their
investments.

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

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Sources of Debt Financing

Commercial
Banks

SBA Guaranteed
Loans

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

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SBA Guaranteed Loans

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The SBA Guaranteed Loan Program

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

The 7(A) Loan Guaranty Program

The most notable SBA program available to small
businesses.
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SBA Guaranteed Loans

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Size and Types of Loans

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

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