Entrepreneurship and Starting a small business

Writing a business plan

A good business plan takes a long time to write, but you've got only five minutes, in the executive summary, to convince readers not to throw it away. Since bankers receive many business plans every day, the summary has to catch their interest quickly. An outline of a comprehensive business plan is shown on the next page. There's no such thing as a perfect business plan; even the most comprehensive business plan changes as the new business evolves.31 Many software programs can help you get organized. One highly rated business-plan program is Business Plan Pro by Palo Alto Software. For a simplified business plan, you may want to check out Fortune 500 executive Jim Horan's book The One Page Business Plan. The book includes a CD with interactive exercises, forms and templates.32 To see samples of successful business plans for a variety of businesses go to www.bplans.com/sample_business_plans. You can also learn more about writing business plans on the Small Business Administration website at www.sba.gov/starting.

Entrepreneurial Teams

A group of experienced people from different areas of business who join to from a managerial team with the skills to develop, make, and market an new product. A team may be better than an individual entrepreneur because team members can combine creative skills with production and marketing skills right from the start. Having a team also can ensure more cooperation and coordination later among functions in the business.

SEA Program

Allows participants to collect unemployment checks while they build their businesses. Participants often get training and counseling as well. Unemployment checks may not seem like much, but many business owners say they are enough to help them launch their companies without depleting savings to pay for living expenses until their businesses are strong enough to support them.24

Getting Money to fund a small business

An entrepreneur has several potential sources of capital: personal savings; family and business associates; banks and finance institutions; angels and venture capitalists; and government agencies such as the Small Business Administration (SBA), the Farmers Home Administration, the Economic Development Authority, and the Minority Business Development Agency. The most common source of funding after personal savings is friends and family.33 You may even want to consider borrowing from a potential supplier to your future business. Helping you get started may be in the supplier's interest if there is a chance you will be a big customer later. This is what Ray Kroc did in the early years of McDonald's. When Kroc didn't have the funds available to keep the company going, he asked his suppliers to help him with the necessary funds. These suppliers grew along with McDonald's. It's usually not a good idea to ask such an investor for money at the outset. Begin by asking for advice; if the supplier likes your plan, he or she may be willing to help you with funding too. The credit crunch spurred by the recent financial crisis made it necessary for small-business owners to do a little extra shopping to find a friendly lender. Many found that smaller community banks were more likely to grant loans than larger regional banks. Since small banks do business in a single town or cluster of towns, they know their customers better. They have more flexibility to make lending decisions based on everything they know about their customers, rather than on a more automated basis as larger banks must. Community development financial institutions (CDFIs) may be a source of funding for businesses in lower-income communities. Today CDFIs are playing a big role in the economic recovery. CDFIs succeeded even after the credit bubble because they maintained the financial discipline other lenders lacked. They have the incentive to make sure their clients succeed because, if borrowers don't repay their loans, the CDFIs take the hit, not investors. Only 1 percent of their loans were not paid back in the last three decades.34 CDFIs don't just loan money. More importantly, they provide business counseling such as helping owners learn how to develop marketing strategies, manage inventory, and improve cash flow

Intrapreneurs

Creative people who work as entrepreneurs within corporations. The idea is to use a company's existing resources—human, financial, and physical—to launch new products and generate new profits. At 3M, which produces a wide array of products from adhesives like Scotch tape to nonwoven materials for industrial use, managers are expected to devote 15 percent of their work time to thinking up new products or services.17 You know those bright-colored Post-it Notes people use to write messages on just about everything? That product was developed by Art Fry, a 3M employee. He needed to mark the pages of his hymnal with something that wouldn't damage the book or fall out. He came up with the idea of the self-stick, repositionable paper slips. The labs at 3M produced a sample, but distributors were unimpressed, and market surveys were inconclusive. Nonetheless, 3M kept sending samples to secretaries of top executives. Eventually, after a major sales and marketing program, the orders began pouring in, and Post-it Notes became a big winner. The company continues to update the product; making it from recycled paper is one of many innovations. Post-it Notes have gone international as well—the notepads sent to Japan are long and narrow to accommodate vertical writing. You can even use Post-it Notes Page 161electronically—the Post-it Software Notes program allows you to type messages onto brightly colored notes and store them on memo boards, embed them in documents, or send them through e-mail. A classic intrapreneurial venture is Lockheed Martin Corporation's Skunkworks, a research and development center that turned out such monumental products as the United States' first fighter jet in 1943 and the Stealth fighter in 1991.18

Challenges of working at home

Getting new customers. Getting the word out can be difficult because you don't have a retail storefront. Managing time. You save time by not commuting, but it takes self-discipline to use that time wisely. Keeping work and family tasks separate. It's great to be able to throw a load of laundry in the washer in the middle of the workday if you need to, but you have to keep such distractions to a minimum. It also takes self-discipline to leave your work at the office if the office is at home. Abiding by city ordinances. Government ordinances restrict the types of businesses allowed in certain parts of the community and how much traffic a home-based business can attract to the neighborhood. Managing risk. Home-based entrepreneurs should review their homeowner's insurance policy, since not all policies cover business-related claims. Some even void the coverage if there is a business in the home. Scoring: Give yourself one point for each 1 or 2 response you circled for questions 1, 2, 6, 8, 10, 11, 16, 17, 21, 22, 23. Give yourself one point for each 4 or 5 response you circled for questions 3, 4, 5, 7, 9, 12, 13, 14, 15, 18, 19, 20, 24, 25. Add your points and see how you rate in the following categories: 21-25 Your entrepreneurial potential looks great if you have a suitable opportunity to use it. What are you waiting for? 16-20 This is close to the high entrepreneurial range. You could be quite successful if your other talents and resources are right. 11-15 Your score is in the transitional range. With some serious work you can probably develop the outlook you need for running your own business. 6-10 Things look pretty doubtful for you as an entrepreneur. It would take considerable rearranging of your life philosophy and behavior to make it. 0-5 Let's face it. Entrepreneurship isn't really for you. Still, learning what it's all about won't hurt anything. Source: Kenneth R. Van Voorhis, Entrepreneurship and Small Business Management (New York: Allyn & Bacon, 1980). Entrepreneurial Teams An entrepreneurial team is 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. A team may be better than an individual entrepreneur because team members can combine creative skills with production and marketing skills right from the start. Having a team also can ensure more cooperation and coordination later among functions in the business. While Steve Jobs was the charismatic folk hero and visionary of Apple Computers, it was Steve Wozniak who invented the first personal computer model and Mike Markkula who offered business expertise and access to venture capital. The key to Apple's early success was that it was built around this "smart team" of entrepreneurs. The team wanted to combine the discipline of a big company with an environment in which people could feel they were participating in a successful venture. The trio of entrepreneurs recruited seasoned managers with similar desires. Everyone worked together to conceive, develop, and market products.8 Micropreneurs and Home-Based Businesses Not everyone who starts a business wants to grow a mammoth corporation. Some are interested in maintaining a balanced lifestyle while doing the kind of work they want to do. Such business owners are called micropreneurs. While other entrepreneurs are committed to the quest for growth, micropreneurs know they can be happy even if their companies never appear on a list of top-ranked businesses. Many micropreneurs are home-based business owners. More than half of all small businesses are run from owners' homes.9 Micropreneurs include consultants, video producers, architects, and bookkeepers. Many with professional skills such as graphic design, writing, and translating have found that one way of starting a freelance business is through websites such as Elance (www.elance.com) and oDesk (www.odesk.com) that link clients and freelancers. The sites post job openings and client feedback and serve as secure intermediaries for clients' payments. Many home-based businesses are owned by people combining career and family. Don't picture just moms with young children; nearly 60 percent are men.10 Here are more reasons for the growth of home-based businesses:11 Computer technology has leveled the competitive playing field, allowing home-based businesses to look and act as big as their corporate competitors. Broadband Internet connections, smartphones, and other technologies are so Page 158 affordable that setting up a business takes a much smaller initial investment than it once did. Corporate downsizing has led many to venture out on their own. Meanwhile, the work of the downsized employees still needs to be done, and corporations are outsourcing much of it to smaller companies. Social attitudes have changed. Whereas home-based entrepreneurs used to be asked when they were going to get a "real" job, they are now likely to be asked for how-to-do-it advice. New tax laws have loosened restrictions on deducting expenses for home offices. Working at home has its challenges, of course. Here are a few:12 Getting new customers. Getting the word out can be difficult because you don't have a retail storefront. Managing time. You save time by not commuting, but it takes self-discipline to use that time wisely. Keeping work and family tasks separate. It's great to be able to throw a load of laundry in the washer in the middle of the workday if you need to, but you have to keep such distractions to a minimum. It also takes self-discipline to leave your work at the office if the office is at home. Abiding by city ordinances. Government ordinances restrict the types of businesses allowed in certain parts of the community and how much traffic a home-based business can attract to the neighborhood. Managing risk. Home-based entrepreneurs should review their homeowner's insurance policy, since not all policies cover business-related claims. Some even void the coverage if there is a business in the home. Home-based entrepreneurs should focus on finding opportunity instead of accepting security, getting results instead of following routines, earning a profit instead of earning a paycheck, trying new ideas instead of avoiding mistakes, and creating a long-term vision instead of seeking a short-term payoff. Figure 6.1 lists 10 ideas for potentially successful home-based businesses, and Figure 6.2 highlights clues for avoiding home-based business scams. You can find a wealth of online information about starting a home-based business at Entrepreneur magazine's website (www.entrepreneur.com). Look for a business that meets these important criteria: The job is something you truly enjoy doing You know enough to do the job well or you are willing to spend time learning it while you have another job you can identify a market for your product or services

Poor Management

Keep in mind, though, that poor management covers a number of faults. It could mean poor planning, recordkeeping, inventory control, promotion, or employee relations. Most likely it includes poor capitalization. To help you succeed as a business owner, in the following sections we explore the functions of business in a small-business setting:

Reasons people are willing to take the entrepreneurial risk

Opportunity. The opportunity to share in the American dream is a tremendous lure. Many people, including those new to this country, may not have the skills for today's complex organizations, but they do have the initiative and drive to work the long hours demanded by entrepreneurship. The same is true of many corporate managers who leave corporate life (by choice or after downsizing) to run businesses of their own. Others, including an increasing number of women, minorities, older people, and people with disabilities, find that starting their own businesses offers them more opportunities than working for others. Profit. Profit is another important reason to become an entrepreneur. Bill Gates, who co-founded Microsoft, is the richest man in the United States and one of the richest people in the world. Independence. Many entrepreneurs simply do not enjoy working for someone else. Melissa Harvey, whose company Will n' Rose's LLC, produces all-natural nut and whole-grain Kizo bars, says one of the best things about being an entrepreneur is the freedom to pursue your passion: "It's about independence. You can take something that motivates you, that inspires you and act on it without roadblocks."3 Challenge. Some people believe that entrepreneurs are excitement junkies who thrive on risk. Entrepreneurs take moderate, calculated risks; they don't just gamble. In general, though, entrepreneurs seek achievement more than power.

Encouraging Entrepreneurship

Part of the Immigration Act passed by Congress in 1990 was intended to encourage more entrepreneurs to come to the United States. The act created a category of "investor visas" that allows 10,000 people to come to the United States each year if they invest $1 million in an enterprise that creates or preserves 10 jobs. Some people are promoting the idea of increasing the allowed number of such immigrants. They believe the more entrepreneurs that can be drawn to the United States, the more jobs will be created and the more the economy will grow.19

Functions of a small business settiing

Planning your business. Financing your business. Knowing your customers (marketing). Managing your employees (human resource development). Keeping records (accounting). Although all the functions are important in both the start-up and management phases of the business, the first two—planning and financing—are the primary concerns when you start your business. The others are the heart of your operations once the business is under way.

Angel

Private individuals who invest their own money in ptotentially hot new companies before they go public.

What does it take to be an Entrepreneur

Self-directed. You should be self-disciplined and thoroughly comfortable being your own boss. You alone will be responsible for your success or failure. Self-nurturing. You must believe in your idea even when no one else does, and be able to replenish your own enthusiasm. When Walt Disney suggested the possibility of a full-length animated feature film, Snow White, the industry laughed. His personal commitment and enthusiasm caused the Bank of America to back his venture. The rest is history. Action-oriented. Great business ideas are not enough. Most important is a burning desire to realize, actualize, and build your dream into reality. Highly energetic. It's your business, and you must be emotionally, mentally, and physically able to work long and hard. Employees have weekends and vacations; entrepreneurs often work seven days a week and don't take vacations for years. Working 18-hour days in your own business can be exhausting, but most entrepreneurs think it is better than working long hours for someone else.Page 155 Tolerant of uncertainty. Successful entrepreneurs take only calculated risks (if they can help it). Still, they must be able to take some risks. Remember, entrepreneurship is not for the squeamish or those bent on security. You can't be afraid to fail. Many well known entrepreneurs failed several times before achieving success. The late football coach Vince Lombardi summarized the entrepreneurial philosophy when he said, "We didn't lose any games this season, we just ran out of time twice." New entrepreneurs must be prepared to run out of time a few times before they succeed.

Enterprise Zones

Specific geographic areas to which goernments attract private business investiment by offering lower taxes and other government support. These are also sometimes call empowerment zones or enterprise communites. In 2014, President Obama announced the creation of the first 5 of 20 "promise zones." The promise zone plan calls on federal agencies to help business owners cut through bureaucracy to win federal grants and bring schools, companies, and nonprofits together to support literacy programs and job training.20 The government could have a significant effect on entrepreneurship by offering tax breaks to businesses that make investments to create jobs. The Jumpstart Our Business Startups (JOBS) Act of 2012 was enacted in an effort to make it easier for small business to raise funds and hopefully create new jobs.21 We talk more about the JOBS Act later in this chapter and in Chapter 17. States are becoming stronger supporters of entrepreneurs, and are creating programs that invest directly in new businesses. Often, state commerce departments serve as clearinghouses for such programs. States are also creating incubators and technology centers to reduce start-up capital needs

Web based businesses

The Internet has sprouted a world of small web-based businesses selling everything from staplers to refrigerator magnets to wedding dresses. In 2013, online retail sales reached $262 billion, or approximately 8 percent of all retail sales. Online retail sales were up 13 percent in 2013, compared to just 2.5 percent for all retail sales. Forrester Research predicts that online retail sales will reach $370 billion by 2017.13 Web-based businesses have to offer more than the same merchandise customers can buy at stores—they must offer unique products or services. For example, Marc Resnik started his web-based distribution company after waking up one morning laughing about his business idea. Now Throw Things.com makes money for him—he's shipped products to more than 44 countries. Although the company's offerings seem like a random collection of unrelated items, everything it sells can be thrown. You can buy promotional products in the "Throw Your Name Around!" section, ventriloquist dummies in the "Throw Your Voice!" section, and sporting equipment in the "Things to Throw!" section. Stranger products include fake vomit ("Throw Up!") and a $3.50 certificate that says you wasted your money ("Throw Your Money Away!"). Resnik doesn't sell very many of those certificates, but he does sell more dummies than anyone else in the United States. About two-thirds of the company's revenue comes from the promotional products section, which allows customers to add a logo to thousands of products. Why is Resnik's business so successful? As one frequent customer said, it's because of Resnik's exceptional service and quick turnaround time.

(P2P) Peer to per lending.

The form of indivdual investing. Crowdfunding. ndividual investors are also a frequent source of capital for most entrepreneurs. Angel investors are private individuals who invest their own money in potentially hot new companies before they go public. A number of websites match people who want money with those willing to lend it. They include donation-based services like Kickstarter, equity-investment sites like Early Shares, and debt-investment sites like Prosper Marketplace. Other sites, such as GreenNote and People Capital, specialize in lending to students. This form of individual investing is called peer-to-peer (P2P) lending or crowdfunding.35 A creditworthy borrower often gets such money faster and more easily than going to the bank. And the cost is often less than a bank loan. With so many crowdfunding sites (there more than 1,000 so far), it can be confusing to know which one is the best fit for you and your prospective business. Reviewing services like CrowdsUnite and Crowdfunding Websites Reviews offer feedback from users of lending sites to help you better understand your options.36 The JOBS Act of 2012 allows businesses to raise up to $1 million a year from private investors without making an initial public offering (discussed in Chapter 17). Unlike many crowdfunding options that accept small donations in exchange for perks like T-shirts and other memorabilia, the JOBS Act allows businesses to solicit larger investments in exchange for either ownership shares in the business or a commitment to repay the loan.37 Many prefer the terms crowdinvesting or equity crowdfunding for this form of fund raising. The Adapting to Change box offers a couple of examples of companies seeking crowdinvested funds. You can read more about how the JOBS Act is changing how businesses can attract investors in Chapter 17

government program

The government can also join with private entities to promote entrepreneurship. For example, Startup America is a White House initiative to "celebrate, inspire, and accelerate high-growth entrepreneurship throughout the nation."25 It is a public and private effort to bring together the country's most innovative entrepreneurs, corporations, universities, foundations, and other leaders, to work with federal agencies to increase the number and success of U.S. entrepreneurs. One of the core goals is to empower more Americans not just to get a job, but also to create jobs. Learn more about the resources offered by Startup America at www.startupamericapartnership.org.

Turning Your passions and problems into opportunities

To look at problems and/or passions and see opportunities in them, ask yourself these questions: What do I want, but can never find? What product or service would improve my life? What really irritates me, and what product or service would help? Keep in mind, however, that not all ideas are opportunities. If your idea doesn't meet anyone else's needs, the business won't succeed. You may have a business idea that is a good opportunity if:7 It fills customers' needs. You have the skills and resources to start a business. You can sell the product or service at a price customers are willing and able to pay—and still make a profit. You can get your product or service to customers before your window of opportunity closes (before competitors with similar solutions beat you to the marketplace). You can keep the business going.

micropreneurs

While other entrepreneurs are committed to the quest for growth, micropreneurs know they can be happen even if their companies never appear on a list of top ranked businesses A team may be better than an individual entrepreneur because team members can combine creative skills with production and marketing skills right from the start. Having a team also can ensure more cooperation and coordination later among functions in the business. Many home-based businesses are owned by people combining career and family. Don't picture just moms with young children; nearly 60 percent are men.10 Here are more reasons for the growth of home-based businesses:11 Computer technology has leveled the competitive playing field, allowing home-based businesses to look and act as big as their corporate competitors. Broadband Internet connections, smartphones, and other technologies are so Page 158 affordable that setting up a business takes a much smaller initial investment than it once did. Corporate downsizing has led many to venture out on their own. Meanwhile, the work of the downsized employees still needs to be done, and corporations are outsourcing much of it to smaller companies. Social attitudes have changed. Whereas home-based entrepreneurs used to be asked when they were going to get a "real" job, they are now likely to be asked for how-to-do-it advice. New tax laws have loosened restrictions on deducting expenses for home offices.

incubators

offer new businesses in the critical stage of early development low-cost offices with basic services such as accounting, legal advice, and secretarial help. According to a recent study conducted by the National Business Incubator Association (NBIA), 87 percent of incubator graduates remain in business.22 Approximately 32 percent of all business incubators have ties to a university.23 To learn more about what incubators offer and to find links to incubators in your area, visit the NBIA's website (www.nbia.org).

Business Plan

s a detailed written statement that describes the nature of the business, the target market, the advantages the business will have over competition, and the resources and qualifications of the owner(s). A business plan forces potential small-business owners to be quite specific about the products or services they intend to offer. They must analyze the competition, calculate how much money they need to start, and cover other details of operation. A business plan is also mandatory for talking with bankers or other investors. Lenders want to know everything about an aspiring business. First, pick a bank that serves businesses the size of yours. Have a good accountant prepare a complete set of financial statements and a personal balance sheet. Make an appointment before going to the bank, and go to the bank with an accountant and all the necessary financial information. Demonstrate to the banker that you're a person of good character, civic-minded and respected in business and community circles. Finally, ask for all the money you need, be specific, and be prepared to personally guarantee the loan.

Affiliate marketing

s an online marketing strategy in which a business rewards individuals or other businesses (affiliates) for each visitor or customer the affiliate Page 160 sends to its website. For example, imagine you discovered a backpack online made of an extremely lightweight, amazingly strong fabric that holds everything you need for the day, is easy to carry, and looks great. You want to tell all your friends about it, so you register as an affiliate on the seller's website and post an affiliate link to the product on your Facebook page. Whenever anyone clicks on the link and buys a backpack, the seller pays you a commission.15