Introduction to Business - Ch 7: Small Business and Entrepreneurship: Economic Rocket Fuel

Beyond the sheer value of the goods and services they generate, small businesses make a powerful contribution to the U.S. economy in terms of (7-6):

- Creating New Jobs - Fueling Innovation - Vitalizing Inner Cities

Finding the Money: Funding Options for Small Businesses (7-3 heading)

For many entrepreneurs, finding the money to fund their business is the top challenge of their start-up year. The vast majority of new firms are funded with the personal resources of their founder. In fact, about 95% of entrepreneurs raise start-up funds from personal accounts, family, and friends. Other key funding sources include bank loans, angel investors, and venture capital firms.

Loans (7-3b)

Getting commercial loans for a new venture can be tough. Banks and other lenders are understandably hesitant to fund a business that doesn't have a track record. And when they do, they require a lot of paperwork and often a fairly long waiting period. Given these hurdles, only 20% of new business owners launch with commercial loans. Unfortunately, small business lending fell 78% in the five years following the Great Recession. And virtually no conventional lending source--private or government--will lend 100% of the start-up dollars for a new business. Most require that the entrepreneur provide a minimum of 25% to 30% of total start-up costs from personal resources. Another source for loans may be the U.S Small Business Administration (SBA). The SBA doesn't give free money to start-up businesses--neither grants nor interest-free loans--but it does partially guarantee loans from local commercial lenders. The SBA also has a microloan program that lends small amounts of money--$13,000 on average--to start-up businesses through community nonprofit organizations.

Gain Experience (7-5a)

Getting roughly three years of experience working for someone else in the field that interests you is a good rule of thumb. That way, you can learn what does and doesn't fly in your industry with relatively low personal risk (and you'd be making any mistakes on someone else's dime). But if you stay much longer than three years, you may get too comfortable to take the plunge and launch your own venture.

The Entrepreneurial Mindset: A Matter of Attitude (7-2a)

Almost every entrepreneur starts as a small business-person--either launching a firm or buying a firm--but not every small businessperson starts as an entrepreneur. The difference is a matter of attitude. Growing popular like Steve Jobs of Apple and Jeff Bezos of Amazon isn't always the aim for small business owners (they only expect to better themselves). Nearly 70% of small business owners say that they don't want to grow any larger. However, classic entrepreneurs who deliver on the promise of their best ideas can dramatically change the economic and social landscape worldwide. E.g. Henry Ford, founder of the Ford Motor Company, Walt Disney, founder of The Walt Disney Company

Survival (7-1e)

Although most entrepreneurs launch their business in response to an opportunity with hopes of improving their lives, some entrepreneurs--called "necessity entrepreneurs"--launch their business because they believe it is their only economic option. Necessary entrepreneurs range from middle-aged workers laid off from corporate jobs, to new immigrants with limited English and heavy accents, to those who experience discrimination in the standard workplace. For each of these types of people, small business ownership can be the right choice in the face of few other alternatives.

Greater Financial Success (7-1a)

Although you can make a pretty good living working for someone else, your chances of getting really rich may be higher if you start your own business. Entrepreneurs: People who risk their time, money, and other resources to start and manage a business. Many people feel that their chances of even moderate financial success are higher if they're working for themselves rather than someone else. The opportunity to make more money is a primary motivation for many entrepreneurs, although other factors clearly play a role as well.

Self-Reliance (7-2b)

As an entrepreneur, the buck stops with you. New business owners typically need to do everything themselves, from getting permits to motivating employees, to keeping the books--all in addition to producing the product or service that made them start the business in the first place. Self-reliance seems to come with an internal locus of control (a deep-seated sense that the individual is personally responsible for what happens in his or her life). People with an external locus of control, rely less on their own efforts, feeling buffeted by forces such as random luck and the actions of others, which they believe will ultimately control their fate.

Independence (7-1b)

Being your own boss is a huge benefit of starting your own business. You answer to no one other than yourself and any investors whom you invite to participate in your business. Bottom line: You are ultimately responsible for your success or failure. But while independence is nice, it's important to keep in mind that every business depends on meeting the needs of its customers, who can be even more demanding than the toughest boss.

Develop a Business Plan (7-5a)

Can a business succeed with a plan? Of course. Many do just fine by simply seizing opportunity as it arises, and changing direction as needed. Some achieve significant growth without a plan. But a business plan (a formal document that describes a business concept, outlines core business objectives, and details strategies and timelines for achieving those objectives) does provide an invaluable way to keep you and your team focused on success. And it's absolutely crucial for obtaining outside funding, which is why many entrepreneurs write a business plan after they've used personal funding sources (such as saving, credit cards, and money from family and friends) to get themselves up and running. An effective business plan, which is usually 25 to 50 pages long, takes about six months to write. The specifics may change by industry.

The Basic Elements of Any Business Plan (7-5a)

Core Questions: - What service or product does your business provide, and what needs does it fill? - Who are the potential customers for your product or service, and why will they purchase it from you? - How will you reach your potential customers? - Where will you get the financial resources to start your business? - When can you expect to achieve profitability? The final document should include all of the following information: - Executive summary (two to three pages) - Description of business (include both risks and opportunities) - Marketing - Competition (don't underestimate the challenge) - Operating procedures - Personnel - Complete financial data and plan, including sources of start-up money (be realistic!) - Appendix (be sure to include all your research on the industry) Check out the SBA business-planning site for more information on how to write your own business plan and for samples of actual business plans (www.sba.gov/smallbusinessplanner/index.html).

Crowdfunding (7-3c)

Crowdfunding is the process of funding ventures by raising money from a large number of investors via the internet. Crowdfunding began to appear in the mid-2000s, and quickly gained traction, becoming a nearly $35 billion funding source by 2016. Experts anticipate that global crowdfunding could grow to $96 billion by 2020. Sites include: gofundme.com, kickstarter.com, and indiegogo.com

Energy (7-2b)

Entrepreneurs simply can't succeed without an enormous amount of energy. Six or seven 12-hour workdays are not atypical in the start-up phase of running a business. In fact, 61% of small business owners report working six or more days per week, compared to only 22% of workers in the general population. And for small business owners, even a day off isn't really off. Only 27% of business owners define a day off as not working at all, while 57% of small business owners say they always or most of the time work on holidays.

Tolerance of Failure (7-2b)

Even when they fail, entrepreneurs seldom label themselves losers. They tend to view failure as a chance to learn rather than as a sign that they just can't do it (whatever "it" may be for them at any given moment). E.g. Walt Disney was fired from an ad agency firm (in hindsight, a rather foolish ad agency) for a "singular lack of drawing ability." Ray Kroc, the man who made McDonald's into a fast-food empire, couldn't make a go of real estate, so he sold milkshake machines for much of his life.

Lower Overhead Costs (7-4a)

Many small firms can hold down overhead costs by hiring fewer managers and fewer specialized employees. Perhaps more importantly, smaller firms--due to a lack of resources--tend to work around costs with tactics such as establishing headquarters in the owner's garage or offering employees flexible schedules instead of costly healthcare benefits.

Tolerance of Uncertainty (7-2b)

More often than others, entrepreneurs see the world in shades of gray rather than simply black and white. They tend to embrace uncertainty in the business environment, turning it to their advantage rather than shying away. Uncertainty also relates to risk, and successful entrepreneurs tend to more willingly accept risk--financial risk, for instance, such as mortgaging their home for the business, and professional risk, such as staking their reputation on the success of an unproven product.

Vision (7-2b)

Most entrepreneurs are wildly excited about their own new ideas, which many seem to draw from a bottomless well. Entrepreneurs find new solutions to old problems, and they develop new products that we didn't even know we needed until we had them. And entrepreneurs stay excited about their ideas, even when friends and relatives threaten to call the loony bin.

Opportunities and Threats for Small Business: A Two-Sided Coin (7-4 heading)

Most small businesses enjoy a number of advantages as they compete for customers. But they also must defuse a range of daunting potential threats to succeed over the long term.

Launching a New Venture: What's in it For Me? (7-1 heading)

Over time, the entrepreneurship rate has played a powerful, positive role in the U.S economy. The new business creation rate in 2014 showed the largest year-over-year increase of the last two decades, but start-up activity still remains below historic norms. As the economy continued to gain momentum, unemployed workers were able to find jobs rather than turn to entrepreneurship.

Entrepreneurship around the World (7-6a)

Research suggests that entrepreneurship has an economic impact in countries around the world. Societies need entrepreneurships to ensure that new ideas actualize and to ensure that people are able to self-employ when their economy does not provide for their basic needs. -High in lower-income countries as they aim to increase the per capita income -Low in countries that provide a high level of employment -High in countries with limited regulation and strong governmental support - Lack of cultural support can cause problems - Entrepreneurs in more supportive nations such as the U.S and New Zealand get a boost from limited regulation and strong government support. View Exhibit 7.5 (pg. 125) for Early Phase Entrepreneurship Rates from 2016.

Challenge (7-1d)

Running your own business provides a level of challenge matched by many other endeavors. Most business owners--especially new business owners--never find themselves bored! Starting a new business also offers endless opportunities for learning that can provide more profound satisfaction for many people than grinding out the hours as an employee.

Small Businesses Opportunities (7-4a)

Small businesses enjoy a real competitive edge across a range of different areas. Because of their size, many small firms can exploit narrow but profitable market niches (a small segment of a market with fewer competitors than the market as a whole. Market niches tend to be quite attractive to small firms due to being not big enough--or high-profile enough--for large firms.)

The Entrepreneur: A Distinctive Profile (7-2 heading)

Successful entrepreneurs tend to stand out from the crowd in terms of both their mindset and their personal characteristics. Consider whether you fit the entrepreneurial profile as you go through the chapter.

Confidence (7-2b)

Successful entrepreneurs typically have confidence in their own ability to achieve, and confidence encourages them to act boldly. But too much confidence has a downside. Entrepreneurs must take care not to confuse likelihood with reality. In fact, many could benefit from the old adage "Hope for the best and plan for the worst."

Technology (7-4a)

The Internet has played a powerful role in opening new opportunities for small businesses. Using a wealth of online tools, from eBay to eMachineshop, companies-of-one can create, sell, publish, and even manufacture goods and services more easily than ever before. "Our website has allowed us to communicate with potential customers and market our business worldwide at very little cost, making international development possible."

Access SBA Resources (7-5a)

The SBA offers a number of resources beyond money. E.g. The SBA website, www.sba.gov, provides a wealth of information from industry-specific statistics, to general trends, to updates on small business regulations. The SBA also works hand in hand with individual states to fund local Small Business Development Centers (SBDCs). They provide a range of free services for small businesses, from developing your own concept to consulting on your business plan, to helping with your loan applications. And the SBA supports SCORE, the Service Corps of Retired Executives, at www.score.org. They provide free, comprehensive, counseling for small businesses from qualified volunteers.

Flexibility (7-1c)

The ability to set your own hours and control your own schedule is a hugely appealing benefit for many business owners, especially parents seeking more time with their kids or retirees looking for extra income. When money isn't the primary goal, the need for flexibility can be enough to motivate many entrepreneurs to launch their own enterprise.

Small Business and the Economy: An Outsized Impact (7-6 heading)

The most successful entrepreneurs create goods and services that change the way people live. But small businesses--despite their lower profile--also play a vital role in the U.S economy. Here are a few statistics from the U.S Small Business Administration: - Small businesses comprise 99.9% of all businesses in the United States - Small businesses account for 48% of all private sector employees. - Yet the opening of new businesses has accounted for over 40% of net new jobs in the U.S economy over the past two decades. The statistics, of course, depend on the definition of small business. For research purposes, the SBA defines small business as companies with up to 500 employees including the self-employed. But the SBA also points out that the meaning of small business differs across industries. To officially count as "small", the number of employees can range from fewer than 100 to 1,500, and the average revenue can range from $0.75 million to $28.5 million, depending on the type of business.

Educate Yourself (7-5a)

The opportunities for entrepreneurial learning have exploded in the past decade. Many colleges and universities now offer full-blown entrepreneurship programs that help students both develop their plans and secure their initial funding. But education shouldn't stop there. Seek out relevant press articles, workshops, websites, and blogs so that your ongoing education will continue to boost your career.

Making it Happen: Tools for Business Success (7-5a)

Whatever way you choose to become a small business owner, several strategies can help you succeed over the long term: gain experience in your field, learn from others, educate yourself, access Small Business Administration (SBA) resources, and develop a business plan. Small Business Administration (SBA): An agency of the federal government designed to maintain and strengthen the nation's economy by aiding, counseling, assisting, and protecting the interests of small businesses.

Launch Options: Reviewing the Pros and Cons (7-5 heading)

When you imagine starting a new business, the first thought that comes to mind would probably be the process of developing your own big idea from an abstract concept to a thriving enterprise. The trick, despite the other routes you can take, is to finding the best fit for you (least harmful downsides and the most meaningful upsides). It's less risky to buy an established business or franchise, but it can be more satisfying to start from scratch. View Exhibit 7.4 on pg. 122 for the pros and cons.

Entrepreneurial Characteristics (7-2b)

While experts sometimes disagree about the specific characteristics of successful entrepreneurs, virtually all include vision, self-reliance, energy, confidence, tolerance of uncertainty, and tolerance of failure. Most successful entrepreneurs have all of these qualities and more, but they come in a huge variety of combinations that highlight the complexity of personality; there is no one successful entrepreneurial profile.

Small Business Threats (7-4b)

While small business do enjoy some advantages, they also face intimidating obstacles, from a high risk of failure to too much regulation. - High Risk of Failure: Starting a new business involves risk--a lot of risk--but the odds improve significantly if you make it past the first five years. Not surprisingly, new research also shows that the five-year survival rate depends fairly heavily on the industry (view Exhibit 7.2-7.3). - Lack of Knowledge and Experience: People typically launch businesses because they either have expertise in a particular area--such as designing websites or cooking Vietnamese food--or because they have a breakthrough idea--such as a new way to develop computer chips or run an airline. Successful business owners must know everything from finance to human resources, to marketing. - Too Little Money: Ongoing profits usually don't being for a while, which means that entrepreneurs must plan on some lean months--or even years-- as the business develops momentum. That means a real need to manage money wisely and to resist the temptation to invest in fixed assets, such as fancy offices and advanced electronics, before sufficient regular income warrants it. It also requires the nerve to stay the course despite initial losses. - Bigger Regulatory Burden: Complying with federal regulations can be challenging for any business, but it can be downright overwhelming for small firms. But relief may be on the way: Congress continues to examine ways to reduce the growing regulatory burden on small businesses--an urgent need in the face of the struggling economy. - Higher Health Insurance Costs: Administrative costs for small health plans are much higher than for large businesses, making it even tougher for small firms to offer coverage to their employees. Given skyrocketing healthcare costs in general, the best employees are likely to demand a great insurance plan, putting small business at a real disadvantage in terms of building a competitive workforce. - Currently, under the Affordable Care Act, all but the very smallest businesses are required to offer "affordable" health insurance to their full-time employees. - Small business owners may find the whole complex ordeal worth it, if they come out on the other side with being able to offer their workers, top-quality health insurance at competitive rates.

Personal Resources (7-3a)

While the idea of using just your own money to open a business sounds great, and more than three-quarters of small business owners spend their own savings as a source of start-up funding, the financial requirements of most new firms typically force entrepreneurs to also tap personal resources such as family, friends, and credit cards. Personal credit cards can be an especially handy--though highly risky--financing resource. In fact, a recent survey found that nearly half of all start-ups are funded with plastic. But watch out,--if you don't pay back your card company fast, you'll find yourself socked with financing fees that can take years to pay off.

Personal Customer Service (7-4a)

With a smaller customer base, small firms can develop much more personal relationships with individual customers.

Learn from Others (7-5a)

You should actively seek opportunities to learn from people who've succeeded in your field. If you don't know anyone personally, use your network to get introductions. And don't forget industry associations, local events, and other opportunities to build relationships. Also, remember that people who failed in your field may be able to give you valuable insights (why make the same mistakes they did?).

Angel Investors (7-3d)

individuals who invest in start-up companies with high growth potential in exchange for a share of ownership They are wealthy individuals who invest in promising start-up companies for one basic reason: to make money for themselves. According to Jeffrey Sohl (director of the Center for Venture Research), angels look for companies that seem likely to grow at 30% to 40% per year and will then either be bought or go public.

Venture capital

venture capital firms: companies that invest in start-up businesses with high growth potential in exchange for a share of ownership These deals tend to be quite visible, but keep in mind that only a tiny fraction of new businesses receive any venture capital money. The advice and guidance that come with the dollar scan also be quite significant.