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Fifth Edition
LAUNCHING
NEW VENTURES
AN ENTREPRENEURIAL APPROACH
Kathleen R. Allen
University of Southern California
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Chapter 2
LEARNING OBJECTIVES
Dispel myths about entrepreneurs.
Understand the pathways to entrepreneurship.
Prepare to become an entrepreneur.
22
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
23
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
ntrepreneurship is a personal journey that begins in the mind of the nascent entrepreneur. It is a personal journey because business is fundamentally about peoplehow they interact, make decisions, plan for the future,
deal with conict, and so on. In fact, all of entrepreneurship can be reduced to
people. From the entrepreneurs motivation to start a business to the decisions
made about growth, customers, facilities, employees, and the exit from the business, everything comes down to people and the needs of those people. Needs
and goals must be satised through the start-up of a new venture or entrepreneurs will not have the motivation to continue in their efforts. The new venture
must also satisfy the needs of customers or they will not be motivated to buy.
Kim Camarella understood this. Through the eyes of her plus-size best friend,
she learned about the difculty that larger young women have nding fashionable apparel. This motivated Camarella to found Kiyonna Klothing, now a successful line of plus-size apparel that is satisfying a real need in the market
(http://www.kiyonna.com).
Finding a market need is a vital rst step. Market needs are dened by customers who purchase based on product or service benets. Another essential
step in the entrepreneurial journey is assembling the right team, which can often
make the difference between success and failure. It is very difcult today to start
a new company as a solo entrepreneur, mostly because any single person rarely
has all the knowledge and skills required to be successful, so assembling a great
team is critical. As part of an enormously successful team, Eric Schmidt stays in
the background when it comes to the press about the company he co-founded
with his much younger partners Sergey Brin and Larry PageGoogle. Brin and
Page were the inuence for the university culture that is now renowned at
Google. This is a team that believes in creating a family in their workplace
environment its easier to get a family united behind a cause than a bunch of
employees, says Schmidt.1 In the fast-moving Internet marketplace, having a
team with compatible values and a laser focus on the company vision is a sure
route to success.
How large to grow the business is very much a personal decision. Entrepreneurs who want to balance work with a personal life may choose to start a business that generates signicant revenues but does not require a great deal of
people and physical assets to manage. That was the position that Neil Johnston
took. After several unsuccessful partnerships that had him doing most of the
work, in 2001 he merged his label business with one of his customers businesses, a solo entrepreneur company that sold bar code labels to libraries. Total
investment by the parties to this venture was $383,000, but it added substantially to the companys ability to grow. By 2002, ID Label had made the Inc.
500 list of fastest-growing private companies in the United States, with revenues
at about $2.2 million. Johnston was able to reduce his workload and nally live
the kind of life he wanted. Johnston is a prime example of an entrepreneur who
does not want the type of business that employs many people. He realized early
on that in his case more employees would not necessarily equal more prots.
Furthermore, the challenges of managing all those employees would involve
more stress than he wanted to take on. Instead, he kept the business at a manageable size and secured the balanced life he had always wanted.2
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
25
The decision about when and how to exit the business is also a very personal
one because it is based on the entrepreneurs goals and values. Some entrepreneurs start many ventures in their lives, so they experience the exit multiple
times. Others, like Bill Gates of Microsoft or Michael Dell of Dell Computers,
stay with their businesses and choose not to exit. And still other entrepreneurs
see their exit strategy change in response to unforeseen circumstances. John
Lusk co-founded Platinum Concepts Inc. in July 1999 with some of his classmates from the Wharton School of Business at the University of Pennsylvania.
Their core product was the MouseDriver, a computer mouse shaped like a golfclub head. Lusks goal was to build the company up as fast as he could in two
years and then sell it to another business. His plan forecasted the companys
revenues skyrocketing to $10 million in 6 months. Unfortunately, this did not
happen within his predetermined timeframe. It took approximately 18 months
to build any sales for the MouseDriver. As a result, Lusk altered his exit strategy,
deciding not to sell the company but instead to spend more time diversifying
the product line and getting his products into the mass market.3
As discussed in Chapter 1, entrepreneurship is a very complex process inspired by and driven by the entrepreneur and his or her co-founders. With the
entrepreneur playing such an important role, one would think that there would
be a denable prole of a successful entrepreneur. But research has failed to nd
that stereotypical entrepreneur. There are, in fact, no psychological or sociological characteristics that can predict who will become an entrepreneur or who will
succeed as an entrepreneur.4 This chapter explores the personal journey of entrepreneurship, what it takes to become a successful entrepreneur, and the many
ways to approach entrepreneurship throughout a career.
27
Pathways to Entrepreneurship
Entrepreneurs are as varied as the kinds of businesses they start. For every characteristic or behavior that denes one successful entrepreneur, another successful entrepreneur who displays completely different characteristics and behaviors
can be found. There are many paths to entrepreneurship, and in the following
sections we look at ve broad categories: the home-based entrepreneur, the Internet entrepreneur, the serial entrepreneur, the traditional entrepreneur, and
the corporate venturer.
29
e-commerce site, something that would have cost hundreds of thousands of dollars less than a decade ago. The Internet has also become an excellent place to
test the waters with a new business idea. Putting up a simple website to gauge
response from potential customers is invaluable and can help a new business get
traction quickly. Demand Media, a rapidly growing new media company based
in Santa Monica, California, tests new Internet sites by putting up a basic site
and monitoring it for a time to see what kind of response they get. When the
company tested their deals.com site this way, they received a much larger
response than expected, so they quickly developed a full e-commerce site and
successfully launched it two weeks later.
31
of auto sales experience, was frustrated by how much low-income people were
spending because they didnt understand how car dealerships worked. To solve
the problem, he launched Bonnie CLAC (car loans and counseling), which not
only guarantees car loans for these people at reasonable rates, but also provides
them with training in how to manage their nances.17 Chapter 11 explores these
types of ventures in more depth from a legal perspective.
ofce. Within three years, his new venture was generating annual sales of
$2.4 billion. EBOs (emerging-business opportunities) is a corporate venturing
program at IBM whose goal is to nd innovations that will generate more than
a billion dollars in annual sales for the company. To counteract the natural tendency of the corporate venturers to want to staff up like a big company, IBM
makes them work alone or perhaps with a colleague. They work on a small budget, but they can tap IBMs wealth of expertise.20
Other companies try to encourage corporate venturing or entrepreneurship
inside the structures of their existing organizations. This approach has been
difcult at best to achieve because the bureaucratic structures of most large
organizationsdeep organizational charts, their inherent avoidance of risk, and
strict budgetsall challenge even the most enthusiastic corporate entrepreneur.
For an entrepreneurial mindset to succeed inside a large corporation, the
following are required:
Senior management commitment. Without the support of senior management, it will be difcult to move any entrepreneurial project forward fast
enough and far enough to be successful.
A champion or several champions. At various points in the development of the
corporate venture, the executive managing the development needs a champion at the highest levels who can open doors and make valuable contacts and
who will lend credibility to the enterprise.
Corporate interoperability. The environment must encourage collaboration
and give the entrepreneur access to the knowledge and resources of all the
companys functional areas, while at the same time allowing the entrepreneur
a high degree of autonomy.
Clearly dened stages and metrics. Entrepreneurial ventures inside large organizations need a timeline with stages at which decisions can be made about
whether to proceed and whether additional or different resources are required. They also need a way to measure progress and success that is not
based on the corporations benchmarks but rather on benchmarks appropriate to start-up ventures with limited resources.
A superior team. Only the best people should be put in corporate venture situations, because by denition these ventures are riskier than projects based
on the companys core skills and products. The new venture team also calls
for a champion among the top management who will secure help for the
team when the project reaches the inevitable roadblock.
Spirit of entrepreneurship. Entrepreneurship is about opportunity
recognizing it, seizing it, and exploiting itbut its also about failing sometimes. A company that encourages corporate venturing must not penalize its
entrepreneurs for failure but must support them as they take what they have
learned to a new project.
This book is not intended to address the specic needs of corporate venturers,
but recognizing opportunities, conducting feasibility analyses, and business
planning are certainly relevant in the corporate environment.
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33
TABLE 2.1
Challenges and Opportunities
with the Entrepreneur Career
Path
Challenges
Opportunities
Creating wealth
Becoming independenttaking charge of a
career
Doing well while doing good through social
entrepreneurship
Working in a business environment that the
entrepreneur creates
Doing something the entrepreneur is passionate
about
Making a difference
Creating new jobs
Supporting the community
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
FIGURE 2.1
35
2. Build a network.
1. Find a mentor.
3. Learn about
entrepreneurs.
6. Study an industry.
FIND A MENTOR
One very specic task that an entrepreneur can undertake to prepare for success
is to nd a mentorthat is, someone who is leading the type of life that the entrepreneur envisions for his or her own future and who can be the entrepreneurs
guide and sounding board as well as champion and gateway to contacts the entrepreneur would otherwise not been able to meet. Vivek, an Indian entrepreneur, discovered that he had become so passionate about the product side of his
computer hardware business that he stopped listening to the good advice he was
being given about the need to diversify his product line. It was not until his
business was facing failure, something that is viewed very negatively in India,
that he sought the guidance and wisdom of a guruji or mentor. The mentor
helped Vivek understand that it was his own ego that was standing in the way of
his success in nding the right path for his business.24
BUILD A NETWORK
Networking is the exchange of information and resources among individuals,
groups, or organizations whose common goals are to mutually benet and create value for the members. Research in the eld of entrepreneurship has revealed
much about the positive effects of networking. For instance, entrepreneurship
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
has been found to be a relational process. Entrepreneurs do not act autonomously but, rather, are embedded in a social context, channeled and facilitated
or constrained and inhibited by peoples positions in social networks.25 These
social networks consist of strong and weak ties. Strong ties are the entrepreneurs
close friends and family members whom he or she knows well, whereas weak
ties are the entrepreneurs acquaintances and business contacts. In general,
acquaintances are not socially involved; that is, entrepreneurs do not generally
spend their nonbusiness hours with acquaintances.26 Nevertheless, these weak
ties play an important role in the entrepreneurial process because entrepreneurs
typically move forward faster with the help and support of weak ties who are not
biased by a prior history with the entrepreneur. Entrepreneurs rely on their
weak ties for objective advice. Family and close friends, on the other hand, tend
to restrict the entrepreneurs potential because they look at the impact on them
of the entrepreneurs business activities.
Effective networks have the following characteristics:
FIGURE 2.2
37
17
16
Professional
Service Providers
Friends and
Family Investors
12
11
6
13
14
10
4
5
1
The Entrepreneur
26
18
27
19
28
22
8
29
20
Manufacturers in China
21
Angel Investors
25
23
24
TABLE 2.2
Social Network Participants
Name
Weak Tie
Tim Burns
Strong Tie
Broker
Source of Help
Business attorney
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Yes
TABLE 2.3
Entrepreneur Personality and
Preferences Questionnaire
39
No
questions in Table 2.3 reect these factors and others that should be considered
as well. The table presents a series of questions that will help entrepreneurs understand more about what they like and dislike about business. Owning a
business is a 24/7 occupation, so it is vitally important that entrepreneurs not
place themselves in unpleasant situations that will affect their ability to perform
at their best. For example, entrepreneurs who have a difcult time with deadlines and pressure would probably not be happy in the world of advertising and
promotion.
Launching a new business requires tremendous amounts of time and energy,
as well as a great deal of support from family and friends. During the early stages
of a new venture, resources are limited and an entrepreneur must wear many
hats. This can be immensely stressful, so it is important that an entrepreneur be
in good health and optimal physical and emotional condition. It is often said
that entrepreneurs start businesses to be in charge of their lives. The reality is
that after they start their own business, they might nd themselves working
more than they ever did for someone else. The major difference is that because
they are building something they own, it doesnt feel like the work they are accustomed to; instead, they are bringing to life a new business that reects their
goals and values.
It is equally important for potential entrepreneurs to think about the kind of
lifestyle they are striving to achieve. Not all businesses support the kind of lifestyle that some entrepreneurs want to lead. Is travel important? Is having a large
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
home and all the things that go with it a requirement? Is achieving a balanced
life with plenty of time for family and friends important? If so, starting a business
that requires a lot of travel or puts the entrepreneur at the mercy of demanding
clients probably wont provide that balanced lifestyle.
Most people spend the majority of the day at their work; therefore, the work
environment should be an enjoyable place to be. Entrepreneurs who love the
outdoors should probably not start businesses that require them to sit at a desk
all day. Entrepreneurs who dont enjoy working with people should probably
not start a business that is labor-intensive or involves numerous daily interactions with the public. It is a good idea for a future entrepreneur to take a step
back and contemplate his or her ideal work environment. What does this environment look like or feel like? What would spending a day in this environment entail?
TABLE 2.4
Critical Entrepreneurial Skills
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
41
the skills that entrepreneurs need to hone to be effective at starting and growing
their businesses.
Entrepreneurial leaders have a distinct advantage over charismatic or heroic
leaders. Being a hero is lonely; there are no peers to conde in or teammates
with whom to share the load. Today, more than ever before, entrepreneurs see
themselves as part of a team, from the founding of the venture throughout all
the various stages in the life of that venture. The days of the gunslinging solo
entrepreneur are gone. Today it takes a team to succeed and a leader who can
inspire others to motivate and lead as well. Entrepreneurial leadership, like any
effective leadership, is a balance of passion and pragmatism. It is the entrepreneurs passion that launches the business and keeps it going through the early
days when survival is often in doubt. But a different kind of leadership is often
required once the business has survived and has entered a growth mode.
A more pragmatic style of leadership that can deliver the right systems and
controls to keep the venture on course is not often found in the same person
who founded the venture. Unfortunately, in private companies it is often the
entrepreneur/founder who is left to decide when it is time for him or her to
hand the reins to a different type of leader, and only the rare entrepreneur recognizes when that moment is at hand. Sometimes, however, the entrepreneur
remains as the visionary leader of the company but brings on a CEO with
professional management skills. This topic is explored in more depth in
Chapter 18.
STUDY AN INDUSTRY
One of the best ways to discover an opportunity is to study an industry in depth,
perhaps even work in the industry for a time. An industry is a group of companies that are engaged in a similar or related activity; for example, the computer
industry consists of all the businesses that provide parts, assembly, manufacturing, and distribution for computersessentially all of the businesses involved in
the value chain for computers. The value chain is comprised of all the businesses
involved in the production of a product or service from raw materials through
delivery to the nal customer and is discussed in more depth in Chapter 4. The
best opportunities come from entrepreneurs experience and knowledge of an
industry, a market, or a type of business. Since opportunities are not limited to
products and services, studying an industry gives individuals the prospect of
identifying opportunity anywhere in the value chain of that industry. A method
for analyzing an industry is presented in Chapter 6.
When all is said and done, business is about relationshipswith partners,
with customers, and with suppliers. Successfully building relationships requires
honesty and integrity. It requires giving value and delivering on promises. An
entrepreneurs core values are the foundation for the business and are always reected in the business and in the way customers are treated. Their integrity is
something that entrepreneurs guard more carefully than anything else because
they cannot afford to taint or lose it. The next chapter explores how entrepreneurs cultivate ideas into business opportunities.
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42
Global Insights
WHEN NEW BUSINESSES GO GLOBAL
Recent research has made a strong case for acceleration in the rate at which companies are internationalizing their business efforts even at the earliest stages.
New ventures, which already suffer from the liabilities of size and newness, must now add the risk of
entering a foreign market with its unique political,
legal, economic, and sociocultural complexities.
K.D. Millers work in this area has provided a framework for managing the risks of internationalization.*
Young businesses can increase their chances of international success by (1) imitation, or entering the
same countries as others in the industry have;
(2) avoidance, or refusing to enter a country where
the risk is unacceptably high; (3) exibility in the design of the company so that it can adapt quickly and
effectively when things change; (4) cooperation, or
entering into strategic alliances to reduce uncertainty;
and (5) control, or attempting to inuence the behavior of others. This last area is most difcult for a
new rm, but the possibility of inuencing customer
behavior exists. For example, in China, entrepreneurs have found funding for mainstream Internet
portals such as Sina.com, Netease.com, and Sohu
.com because the portal industry is large and demand
is great. But entrepreneurs with business concepts
that are less mainstream will probably not nd a
ready market at the outset. Entrepreneurs looking to
expand their markets into China (or any other international location) need a very clear strategy, strong
nancial backing, and an effective teamvery much
as they do in the United States.
*K.D. Miller, A Framework for Integrated Risk Management in
International Business, Journal of International Business Studies,
23 (1992): 311331.
ACE
elf- sts
te
business.college.hmco.com/students
Issues to Consider
1.
2.
3.
4.
5.
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43
Experiencing Entrepreneurship
1. Identify an entrepreneur who is leading the kind
of personal and business life that you aspire to
lead. Interview that person to nd out more
about how she or he achieved that lifestyle. During the interview, and only if the two of you have
developed a rapport, approach the entrepreneur
about the possibility of becoming your mentor.
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.