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*Chapter Six

Entrepreneurship and Starting a

Small Business

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

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• First African-American woman to become a billionaire and first to own three professional sports teams.

• BET debuted in 1980.

• Johnson developed many of the network’s most successful shows like, Teen Summit.

• Now a part owner in Mistral and CEO of Salamander Hospitality.

ProfileSHEILA C. JOHNSONBlack Entertainment Television (BET)

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*The Job-Creating Power of Entrepreneurship in the U.S.

• Entrepreneurship –

• Accepting the risk of starting and running a business.

WHAT is ENTREPRENEURSHIP?

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*The Job-Creating Power of Entrepreneurship in the U.S.

• French immigrant Élruthère Irènèe du Pont de Nemours started Du Pont in 1802.

• David McConnell borrowed $500 from a friend to start Avon.

• George Eastman started Kodak with a $3,000 investment in 1880.

• Jeff Bezos started Amazon.com with investments from his family and friends.

NOTABLE ENTREPRENEURS

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• Leanna Archer – At 12 years old, she has her own hair care line.

• Alexis Holmes – Started baking for a fundraiser, now the 16-year-old owns her own bakery.

• Jack Short & Daniel Lyons – The two medical students started Factory Green, a carbon neutral apparel company, as undergrads.

• Mark Zuckerberg – Launched Facebook as a Harvard freshman.

YOU’RE NEVER TOO YOUNG to be an ENTREPRENEUR

(Spotlight on Small Business)

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Source: Entrepreneur, www.entrepreneur.com, March 2009.

The Job-Creating Power of Entrepreneurship in the U.S.

Age Range Percent Identified as Self-Employed

55 to 59 28%

60 to 65 36%

66 to 70 42%

YOU’RE NEVER TOO OLD to be an ENTREPRENEUR EITHER!

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*Why People Take the Entrepreneurial Challenge

• Opportunity

• Profit

• Independence

• Challenge

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WHY TAKE the RISK?

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*Why People Take the Entrepreneurial Challenge

• Self-directed

• Self-nurturing

• Action-oriented

• Highly energetic

• Tolerant of uncertainty (risk-tolerant)

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WHAT DOES IT TAKE to be an ENTREPRENEUR?

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*Turning Your Passion and Problems into Opportunities

• It fills customers’ needs.

• You have the skills and resources to start a business.

• You can sell the product or service at a reasonable price and still profit.

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An IDEA is a GOOD OPPORTUNITY IF…

• You can get your product or service to customers before the window of opportunity closes.

• You can keep the business going.

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*Entrepreneurial Teams

• Entrepreneurial team -- A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product.

• An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apple’s success.

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ENTREPRENEURIAL TEAMS

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*Micropreneurs and Home-Based Businesses

• Micropreneur -- Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle.

• Many micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc.

• Nearly 60% of home-based micropreneurs are men.

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MICROPRENEURS

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*Micropreneurs and Home-Based Businesses

• Computer technology has leveled the playing field.

• Corporate downsizing has led many to venture on their own.

• Social attitudes have changed.

• New tax laws have loosened restrictions on deducting expenses for home offices.

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HOME-BASED BUSINESS GROWTH

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Source: St. Louis Small Business Monthly, February, 2004.

• Ability to start your business immediately• Minimal startup capital needed• No rent or excessive set-up charges• Comfortable working conditions

Micropreneurs and Home-Based Businesses

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BENEFITS of HOME-BASED BUSINESSES

• Reduced wardrobe expenses• No commuting• Tax benefits• Elimination of office politics• Low risk for trial and error

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Source: St. Louis Small Business Monthly, February, 2004.

• Difficult to establish work habits

• Limited support system

• Isolation

• Work space may be limited

• Disruption of personal life

• Clients may be uncomfortable coming to your home

• Zoning restrictions

• Success is based 100% on your efforts

Micropreneurs and Home-Based Businesses

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DOWNSIDES of HOME-BASED BUSINESSES

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• The latest outsourcing trend is using the Internet to find affordable labor around the world.

• Elance provides small businesses with a hub to find low-cost contractors.

• Thanks to the inexpensive freelancers, Elance now has 48,500 clients, up 70% since 2007.

OUTSOURCING YOUR SMALL BUSINESS

(Reaching Beyond Our Borders)

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*Web-Based Businesses

• Affiliate Marketing -- An Internet-based marketing strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website.

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ONLINE BUSINESS

• Web-based businesses have more unique products than most brick and mortar stores.

• Online sales reached $165.9 billion in 2007, 8% of all retail sales.

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*Entrepreneurship Within Firms

• Intrapreneur -- A creative person who works as an entrepreneur within a corporation.

• Intrapreneurs use a company’s existing resources to launch new products for the company.

• Art Fry of 3M developed Post-Its when he was trying to mark pages of his hymnal without damage.

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INTRAPRENEURS

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*Encouraging Entrepreneurship: What Government Can Do

• Immigration Act passed in 1990 created a category of “investor visas” that encourage entrepreneurs to come to the U.S.

• Enterprise Zones -- Specific geographic areas to which governments attract private business investment by offering lower taxes and other government support.

• Incubators -- Offer new businesses low-cost offices with basic services.

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GOVERNMENT and ENTREPRENEURSHIP

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*Small Versus Big Business

• Small Business -- Independently owned and operated, not dominant in its field of operation and meets certain standards of size.

• Businesses are “small” in relationship to other businesses in their industries.

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SMALL BUSINESSES

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*Small Versus Big Business

• There are 26.8 million small businesses in the U.S.

• Of all nonfarm business in the U.S., almost 97% are considered small.

• Small businesses account for over 50% of the GDP.

• Small businesses generate 60-80% of new jobs.

• About 80% of U.S. workers first jobs were in small business.

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SMALL BUSINESS STATISTICS

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*Importance of Small Business

• More personal customer service.

• The ability to respond quickly to opportunities.

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ADVANTAGES of SMALL OVER BIG BUSINESS

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*Small Business Success & Failure

• Owner closing a business to start another is reported as a “failure.”

• Changing forms of ownership is reported as a “failure.”

• Retirement is reported as a “failure.”

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BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE…

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Source: World Features Syndicate, 2009.

• Tommy Hilfiger – First store went bankrupt

• Milton Hershey – First confectionary failed

• H.J. Heinz – Company went bankrupt six years after start

Small Business Success & Failure

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THEY DID WHAT?Famous Business Failures

• Walt Disney – First film company went bankrupt

• Henry Ford – First two car companies failed

• L.L. Bean – Almost went bankrupt in first year

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*Learning About Small Business Operations

• Learn from Others – • Investigate your local colleges for classes on

small business and entrepreneurship; talk to and work for successful local entrepreneurs.

• Get Some Experience – • Gain three years experience in the field; then start

a part-time small business.• Take Over a Successful Firm –

• Serve as an apprentice and eventually take over once the owner steps down.

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LEARNING ABOUT SMALL BUSINESS

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Suppose you worked in a company for two years and you see signs of it faltering. You and a coworker have ideas about how to succeed and are considering quitting to start your own company.

• Should you approach other coworkers about working for your new venture?

• Will you try to lure your old boss’ customers?

• What are the alternatives?

• What are the consequences?

• What is the most ethical choice?

GOING DOWN WITH the SHIP(Making Ethical Decisions)

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*Managing a Small Business

• Planning

• Financing

• Knowing customers

• Managing employees

• Keeping records

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MAJOR BUSINESS FUNCTIONS

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*Begin with Planning

• Business Plan –

• Detailed written statement that describes nature of business, target market, advantages business will have over competition, and resources and owners qualifications.

• A business plan forces potential owners to be specific about what they will offer.

• A business plan is mandatory for talking with bankers or investors.

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BUSINESS PLANS

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*Writing a Business Plan

• A good plan takes a long time to prepare.

• A good executive summary catches interest and tempts potential investors to read on.

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WRITING a BUSINESS PLAN

• Getting the plan into the right hands is almost as important as getting the right information in it.

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Source: Business Week Small Biz, www.businessweek.com, February/March, 2008.

• Clarify Expectations – What will each person contribute?

• Discuss Work/Family Boundaries – What is the line that separates work from personal relationships?

• Develop Good Communication – Agree about types of decisions you’ll make jointly and on own.

• Clarify Long-Term Intentions – Discuss how long everyone will work full time and goals for the business.

• Have an Escape Hatch – Have a Plan B.

Writing a Business Plan

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A FAMILY AFFAIRWhat to Consider Before Starting a Family Business

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*Getting Money to Fund a Small Business

• Personal savings

• Relatives

• Former employers

• Banks & finance companies

• Government agencies

• Angel investors

• Venture capitalists -- Individuals or companies that invest in new businesses in exchange for partial ownership.

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SOURCES of CAPITAL

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Source: CFO Magazine, www.cfo.com, September 2008.

Getting Money to Fund a Small Business

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ANGELS ABOVEIndustry Sectors Favored by Angel Investors

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*The Small Business Administration

• Small Business Administration (SBA) –

• U.S. government agency that advises and assists small businesses by providing management training and financial advice.

• SBA started a microloan program in 1991 that provides very small loans to small business owners.

• Program judges worthiness on belief of the borrower’s integrity and soundness of their business ideas.

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The SMALL BUSINESS ADMINISTRATION

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*The Small Business Administration

• Small Business Investment Company (SBIC) -- A program through which private investment companies licensed by the SBA lend money to small businesses.

• A SBIC must have a minimum of $5 million in capital and can borrow up to $2 from the SBA for each $1 of capital it has.

• SBICs are able to identify a business’s trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.

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The SMALL BUSINESS INVESTMENT COMPANY

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*The Small Business Administration

• Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states.

• SBDCs are able to evaluate the feasibility of your idea, develop your business plan and complete your funding application – for no charge.

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SMALL BUSINESS DEVELOPMENT CENTERS

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*Knowing Your Customers

• Market -- Consumers with unsatisfied wants and needs who have both resources and willingness to buy.

• Set out to fill the market’s needs by offering top quality and great service at a fair price.

• One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.

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The MARKET

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*Managing Employees

• Hiring, training and motivating employees is critical.

• Employees of small companies are often more satisfied with their jobs – they feel challenged and respected.

• Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.

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MANAGING EMPLOYEES

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*Keeping Records

• Computers simplify the process by helping with inventory control, customer records and payroll.

• A good accountant can help in:- Deciding whether to buy or lease equipment. - Deciding whether to own or rent a building.- Tax planning.- Financial forecasting.- Choosing sources of financing.- Writing requests for funds.

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ACCOUNTING ASSISTANCE

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*Looking for Help

• Owners need outside consulting advice early in the process.

• Small and medium-sized firms cannot afford to hire experts as employees.

• A competent lawyer can help with:- Leases- Contracts- Partnership agreements- Protection against liabilities

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LEGAL HELP

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*Looking for Help

• Marketing decisions need to be made long before introducing a product or opening a store.

• A marketing research study can help you:- Determine where to locate.- Whom to select as your target market.- What is an effective strategy for reaching the

market.

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MARKETING RESEARCH

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*Looking for Help

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OTHER FORMS OF HELP

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• Gary Hirshberg of Stonyfield Yogurt wanted to run a profitable business that didn’t hurt the environment.

• Stonyfield Yogurt is a 100% organic operation.

• It’s green practices save the company millions of dollars each year.

• After just 15 years, Stonyfield outsells Kraft Foods yogurt.

THINKING GREEN LOGO

SOCIAL ENTREPRENEURSHIP:RESPONSIBLE and PROFITABLE

(Thinking Green)

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*Going International: Small Business Prospects

• Small and medium-sized businesses accounted for 99% of recent export growth.

• Advantages of global trade for small businesses:- Overseas buyers enjoy dealing with individuals.- Small companies can usually begin shipping

much faster.- They provide a wide variety of suppliers.- They can give more personal service and

attention.

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SMALL BUSINESS PROSPECTS ABROAD

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*Progress Assessment

• Can you describe at least five sections of a business plan?

PROGRESS ASSESSMENT

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*Progress Assessment

• Why do many small businesses avoid doing business overseas?

• What are some of the advantages small businesses have over large businesses in selling in global markets?

PROGRESS ASSESSMENT

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*Progress Assessment

• Why are people willing to take the risks of entrepreneurship?

• What are the advantages of entrepreneurial teams?

• How do micropreneurs differ from other entrepreneurs?

• What are some opportunities and risks of web-based businesses?

PROGRESS ASSESSMENT

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