GB 490 Unit 13: Entrepreneurship

(Principle 7: Bootstrapping is an ideal way to break the vicious cycle at start-up) 1. However, a common reason for failure is under-capitalization. Liquidity issues (Cash) are at the top of the list and suggests that cash management is imperative to survival. 2. Liabilities of Newness and Smallness are similar topics in the entrepreneurship literature that discuss reasons for failure.

(Principle 7: Bootstrapping is an ideal way to break the vicious cycle at start-up) 1. While having sparse resources has its advantages, it of course also presents problems 2. It is well known that failure rates of new businesses are high. -Exact statistics are not available, but it is fair to say that more than two-thirds of all business start-ups do not make compensatory returns for their founders. -The most common reason cited for failure is Under-Capitalization (another way of saying the new firm ran out of cash)

Inefficiencies

As mentioned before, a third source of entrepreneurial opportunities is the inefficiencies embedded in a society's existing economic structure. Inefficiencies are manifest in forms of incongruities, which are discrepancies, a dissonance, between what is and what ought to be. Whenever and wherever these incongruities are large, we are faced with forces to carve out profitable new entrepreneurial opportunities. Incongruities present conditions that are favorable for the creation of something new.

Principle 8: Cash is King-- and is most expensive when you need it most. 1. In addition to the liabilities of newness and smallness, entrepreneurial ventures face what may be called the Liabilities of Complexity. 2. One need not emphasize the point that managing a business venture is a highly complex process.

3 specific complexities need special attention 1. Management of Ideas 2. Management of Attention 3. Management of Logistics

Principle 10: Find the fundamental drivers -Every new business has three to five fundamental drivers. Find them and focus on them. The task of creation becomes easy.

Entrepreneurship is about finding new formulas or ways to create value. You profit if you can create ways to use resources more cheaply and creatively in order to create products and services that offer new value to customers. This chapter has suggested some simple rules to follow to ensure that the probability of success during the discovery and creation process remains high while the potential exposure to loss due to failure is kept at affordable levels.

Entrepreneurial opportunities and Frank Knight 1. Economist Frank Knight pointed out an important quality about entrepreneurial opportunities, namely that there is a fundamental uncertainty about them -he observed that one cannot collect more information or perform more analysis in order to reduce uncertainty -Rather only the the collective actions of competing entrepreneurs , resource suppliers, and customers can reduce uncertainty's

There is no meaningful way in which to predict the future prospects of an entrepreneurial opportunity and then act on it -Knight pointed out this important distinction between uncertainty and risk

(Principle 7: Bootstrapping is an ideal way to break the vicious cycle at start-up) -CASH 1. Cash is the most important asset for any start-up because it is the ultimate store of value that can be traded for other vaulable assets. -While social capital certainly helps, it is not as liquid or as tradable as cash and social capital is most effective at the earliest stages of a creative process. -Growth demands a more fungible asset such as cash 2. The ability to sustain the creation process therefore hinges on the availability of cash -As soon as cash dries up in a business, it is suseptible to failure 3. Important to appreciate us that a business can be profitable and yet go out of business if it runs out of cash

-CASH 1. If cash inflows and cash outflows in a business do not match each other, then the probability of running out of cash is quite high -This imbalance arises due to many factors, such as lags between sales and collections, seasonality of business, inability to reliably predict inflows and outflows because the business is too new to be able to do so, and so on. ---- The literature of entrepreneurship calls these problems the "liabilities of newness and the liabilities of smallness" 2. The worst possible time to raise cash is when you need it most. -then you have the lowest bargaining power -the need to raise cash is greatest at the early stages of a new venture and when you face a crisis 3. Cash is critical, and often most difficult to obtain when it is most needed.

Including inefficiencies, the following are major sources for the creation of new wealth for the enterprising entrepreneur and society:

1. Stickiness of resources 2. Information asymmetry 3. Limited knowledge 4. Creativity

("Things favorable to an end...") In the case of an entrepreneurial opportunity, the "things favorable" consist of two categories:

1. Beliefs about the future 2. Actions based on those beliefs

(Incongruities) Incongruities may manifest as:

1. Contradictions within the economic realities of an industry (for example, high growth accompanied by low profitability) 2. When the reality of an industry clashes with the assumptions about it (when the things people within the industry know and think about themselves are different from the things people outside know and think about them) 3. When there is a gap between perceived and actual customer needs and expectations; and when there is a gulf between the pace of change in the business processes within an industry and in the world around it.

Effectuation

1. Effectuation is an extension of the bootstrapping idea that suggests that many good entrepreneurs do not even start with a specific idea, but develop the business idea during the process of creation. 2. Rather than starting out with a specific business idea, the entrepreneur tries to figure out what businesses can feasibly be created with the resources he or she controls. 3. Given means, what ends can one create? 4. Successful entrepreneurs do not necessarily cling to a specific product or company idea, but are willing to let these ideas emerge and evolve as they use the resources at their command to create a successful business enterprise.

Entrepreneurial Creation and Leadership

1. Entrepreneurial creation is the process of carving out a specific new business idea from the raw material of broad social, economic, technological, and political trends with the help of our commonly held resources—namely, talent, imagination, energy, education, time, and contacts. 2. An entrepreneurial leader is one who imagines a future business possibility within a framework of macro forces and trends, and acts to bring the future into existence with a sense of urgency, unconstrained by the limited set of means at his or her disposal, with commitment and flexibility during the creation process, in order to profit from the journey.

Principle 1: Entrepreneurial opportunities are rarely found; they have to be created and earned.

1. Entrepreneurial opportunities are often really broad macro forces, such as social trends, demographic shifts, technological breakthroughs and inventions, and political revolutions from which we as individuals have to carve out a specific piece that eventually becomes an opportunity for creating something new. 2. As such, opportunities rarely lie around—they have to be created and earned through imagination, hard work, and certainly a little bit of good luck.

What is entrepreneurship?

1. Entrepreneurship is about creating a new enterprise with resources, tangible or otherwise, that are in your control. 2. Entrepreneurs use these resources to create new value for society by either improving upon existing inefficiencies or bringing to market new products or processes.

Principle 9: If cash does not kill you, logistics will

1. Entrepreneurship is about discovering or creating a new formula or yet another way to create value. 2. Indeed, "an entrepreneurial discovery (or creation) occurs when someone makes the conjecture that a set of resources is not put to its 'best use' {i.e., the resources are priced to low, given a belief about the price at which the output from their combination could be sold in another location, at another time, or in another firm}. -If the conjecture is acted upon and is correct, the individual will earn an entrepreneurial loss. (this is a roundabout way of saying that the essence of entrepeneurship is finding ways to "buy low and sell high"!)

(Principle 7: Bootstrapping is an ideal way to break the vicious cycle at start-up) Many entrepreneurs claim that you are better off having sparse resources because it

1. Lowers risk 2. Forces creativity 3. Focuses on generating revenues to build the business

Principle 4: Affordable loss and the tension between a bias for analysis and a bias for action. -By adopting the affordable loss principle, enterprising individuals are able to resolve the tension between a bias for analysis and a bias for action.

1. Most resources for creating products, services, or markets comes from other people and institutions. - thus the entrepreneurship has to assemble the resources and the value-chain infrastructure before potential profits can be realized 2. The process of creating products and markets implies that much of the information required by potential resource suppliers is not reliably available - relevant information will become available only when the market has been successfully created 3. Since much of the information required by resource providers resides with the entrepreneur, potential stakeholders rely on the entrepreneur for information. -Therefore, information asymmetry and fear of opportunistic behavior make wrangling resources quite difficult for early phase ventures.

Inefficiencies arise from one of two sources:

1. When it is difficult to remove poorly used resources from where they are currently employed and reapply them in ways that are more useful 2. When different people have different information, conjectures, or ideas about the future prospects of resources, products, customer needs and preferences, the value chains of industries, and the broad social, economic, political, and technological trends - These inefficiencies offer enterprising people an enormous pool of opportunities for the creation of a successful new business -practically every industry has pockets of such inefficiencies, although the scale and scope of such inefficiencies are likely to be much higher in newer industries

(5 categories of social capital) There are five categories of social capital that are relevant for entrepreneurship. -Building a new business offers aspiring entrepreneurs an opportunity to exchange these social assets for resources of value to the business. -think of the 5 categories of social capital as debts that people owe you becuase of many favors you have done for them or happy moments you have shared with them over the years.

5 categories of social capital 1. Obligation -is a mutually perceived understanding of a debt incurred sometime in the past and a mutual expectation that this debt will be released under suitable circumstances -thus Obligation is earned and discharged like any other commodity -however, it remains an unstated expectation, the other person may or may not return the favor 2. Gratitude -Gratitude is a more valuable asset than obligation because the emotional ties are stronger. -Gratitude is a case where there is clear recognition, not just an expectation, that a favor must be repaid in the future and the account will be discharged by the return of the favor 3. Trust -Trust is even stronger than gratitude because there is a more formal recognition that favors will be returned, as opposed to mutual but unspoken expectation or perception. -In contrast to obligation and gratitude, where is always uncertainty that an emotional debt will be repaid, trust reduces the uncertainty that an appropriate repayment will take place in the future 4. Liking -Liking takes us further in this spectrum of emotional debt. -The feeling for the other individual is more intense and there is a genuine desire to help the person we like. -Our happiness and well-being are enhanced when people we like do well, especially when we play a part in their achievements. 5. Friendship -Friendship evokes the strongest emotional reaction -Friendship's distinctive quality is that it can be used repeatedly without being exhausted, unlike gratitude and obligation, which may be exhausted after past favors or debts are fulfilled. -Indeed, the act of helping a friend in need may actually reinforce the friendship -However, friendships are fragile, take a long time to initiate, nurture, and deepen, and are relatively rare.

New Knowledge

A second source of opportunity is inventions and discoveries that produce new knowledge. Technological developments and breakthroughs in university laboratories and other research institutions, corporate or otherwise, offer excellent prospects for commercial opportunities. The latest developments in science, arts, crafts, and music all present conditions for fashioning entrepreneurial opportunities. The process of converting artistic and scientific knowledge into products and processes that satisfy specific needs and problems is another major source of entrepreneurial opportunity.

Principle 3: A bias toward action A fear of missing the upside of a good opportunity biases one toward action. A bias for action significantly increases the probability of business entry, but often decreases the probability of success.

Affordable loss principle 1. Affordable loss principle - is the amount of personal resources that the entrepreneurs feel psychologically comfortable committing to an idea, and, at an extreme, they follow the rule of using zero resources to market. 2. The affordable loss principle allows entrepreneurs to act without being paralyzed by the fear of the downside, because they do not stand to lose much if the venture fails.

Principle 5: A vicious cycle... 1. While the affordable loss priciple allows the entrepreneur to keep the loss exposure low, a strategy of starting with what you already have in order to build a the business rapidly is important for breaking out of the vicious cycle.

All creative endeavors involve a vicious cycle: No product implies no customers; No customers implies no revenue; No revenue implies no cash for investment; No investment implies no legitimacy or credibility; No legitimacy implies no resources; No resources implies no product.

Principle 6: Can one break the cycle with common resources?

Bootstrapping involves three components: 1. Asset parsimony - Using resources very sparingly and investing your imagination before you spend your money. -Systematic approach to operating with sparse resources -Asset parsimony strategy keeps the loss exposure of the entrepreneurs very low, and at the same time allows one to create something with little -The logic of asset parsimony rests on using underutilized resources, thus keeping costs low 3. Leveraging social assets - Exchanges with social relationships. -Using social skills and social capital to obtain resources. -The currency of ones social network is friendship and goodwill rather than dollars 3. Resourcefulness - Skillfully using tools and network to access resources.

(2 types of knowledge- Dispersed Information) Dispersed information is a basic explanation for how an enterprising individual and the unfolding forces and trends combine to crystallize an opportunity to create and exploit new products in existing 0r new markets

Dispersed Information -this information is diffused in the economy and is not a given or at everyone's disposal -This knowledge is typically IDIOSYNCRATIC because it is acquired through each individuals own circumstances, including occupation, on-the-job routines, social relationships, and daily life

(Entrepreneurial opportunities) 1. Entrepreneurial opportunities present us with possibilities for both a gain and a loss. 2. Seizing opportunities requires making investments (time, effort, and money) today without knowing the returns of tomorrow. -BY definition, entrepreneurship requires making investments (time, effort, and money) today without knowing what the distribution of the returns will be tomorrow

Entrepreneurial opportunities

The Nexus of Opportunity and the Individual

It is one thing to observe and appreciate the unfolding forces and trends, but an entirely different matter to be able to fashion an opportunity out of these trends and forces. How does one fashion a specific opportunity from such macro forces and trends? At the beginning stages of a new idea, the effectiveness of the individual is enormous. At the minimum, an opportunity involves an end or purpose, and things favorable to the achievement of it.

(Information Sources) 1. It is useful to separate two main categories of information sources: primary sources of experience and information and secondary sources.

Primary sources are those that exist within us: experiences, knowledge, and information that are personal. Secondary sources are experiences of other people and institutions, and often involve deliberate search among sources outside of our own self and experience.

Exogenous Changes

Sometimes social and political changes are a result of business practices or cultures (such as globalization), but in most cases, individual firms can rarely influence such forces. Hence, forces are largely outside the control of individuals. Large-scale macro forces give rise to fundamental changes in how we live, where we live, and what we prefer, thus providing numerous opportunities for entrepreneurs to create and market new products and services. Demographic changes alter the size, average age, structure, composition, employment, educational status, income, and health of the population. Environmentalism, feminism, globalism, urbanization, democratization, poverty, and a variety of other social, economic, and political movements have fundamentally changed the attitudes of people about what is important and urgent in life.

(Beliefs) 1. To form beliefs and to act on them requires information and a predilection to act on this information. -Such information, or knowledge, is found both within the individual and outside.

Two types of knowledge: 1. Scientific Knowledge -stable and can be best known by suitably chosen experts in their respective fields 2. Dispersed information, particular to a time and place -the importance is judged by the individual possessing it -

Principle 5: Breaking the vicious cycle

Using what you have... 1. Entrepreneurs leverage the necessary resources required to break out of the vicious cycle without increasing their overall exposure to loss from a failed venture. Entrepreneurs can use the following: Human capital (talent, education, and knowledge) Intellectual capital (creativity, resourcefulness, enthusiasm, and optimism) Social capital (contacts with people and their contacts)