Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business

You can't cross the sea merely by standing and staring at the water.
--Rabindranath Tagore

It's not how many times we stumble and fall down that matters.
It's how many times we stumble and get back up that counts.
--Max Carey, Jr.

Learning Objectives
Students will be able to:
1. Define the role of the entrepreneur in the U.S. economy.
2. Describe the entrepreneurial profile.
3. Describe the benefits of owning a small business.
4. Describe the potential drawbacks of owning a small business.
5. Explain the forces that are driving the growth in entrepreneurship.
6. Discuss the role of diversity in small business and entrepreneurship.
7. Describe the contributions small businesses make to the U. S. economy.
8. Explain the reasons small businesses fail.
9. Put business failure into the proper perspective.
10. Explain how small business owners can avoid the major pitfalls of running a business.

Instructor’s Outline
I. Introduction
A. The dramatic resurgence of the entrepreneurial spirit:
1. A recent study by the National Panel Study of U.S. Business Start-Ups found that 8 million people,
or one in 25 adults, were actively engaged in trying to launch a new business.
2. This resurgence of the entrepreneurial spirit is the most significant economic development in recent
business history.
3. Entrepreneurs have introduced innovative products and services, pushed back technological frontiers,
created new jobs, opened foreign markets.
4. As a result, they sparked the U.S. economy into regaining its competitive edge in the world.
5. In 1969, entrepreneurs created 274,000 new corporations; today, the number of new incorporations
exceeds 800,000 per year.
6. In a recent survey of college seniors, 49 percent of the men and 31 percent of the women said they were
interested in pursuing entrepreneurship when they graduate.

B. Increase in launch of new business:

1. Due to new technological developments, it is possible for companies to accomplish more with fewer
people. As a result, people who once saw launching a business as being too risky now see it as the ideal
way to create their own job security.
2. Although launching a business is never easy, the resources available today make the job much simpler
today than ever before since thousands of colleges and universities offer courses in entrepreneurship.
3. Internet hosts a sea of information on launching a business including sources of capital.
4. Another significant shift in growth of small company has been due to significant shift in our nation's
economic structure (rapidly moving away from an industrial economy to a knowledge-based one).

II. What is an entrepreneur?

A. Definition
1. An entrepreneur is one who creates a new business in the face of risk and uncertainty for the purpose
of achieving profit and growth opportunities and assembles the necessary resources to capitalize on
those opportunities.

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IN THE FOOTSTEPS OF AN ENTREPRENEUR – From the Ice Age to Outer Space

Two characteristics common to entrepreneurs are creativity and an eye for opportunity.

An Opportunity from the Ice Age.

Ronald Stamp has an idea about how to use the 750 or so icebergs that break off from glaciers each year and drift
south past Greenland into the Atlantic. Stamp, a former fish wholesaler, is lassoing icebergs and melting them down
to make spring water! Recognizing the marketing potential of water made from glacial ice, Stamp has an eye on
tapping into the $30 billion-a-year bottled water business.

The first obstacle Stamp faced was figuring out how to capture icebergs and process them. Stamp met Paul
Benson, owner of a spring water business, and the two formed Iceberg Industries. In addition to raising $500,000
from investors, Stamp and Benson finally developed a workable method for harvesting icebergs. They purchased a
barge with heated tanks onboard and converted it into a floating water factory. Outfitted with a crane and a
hydraulic grapple originally designed to bite chunks out of granite, the barge is towed by a tugboat into the Atlantic
each spring, where it spends the next eight months harvesting icebergs. The tugboat lassos the iceberg and pulls it
next to the barge, where the grapple bites off a half-ton chunk of ice. Another device equipped with rotating steel
teeth crushes the ice before it goes into the heating tanks. There, the ice is melted and filtered. Once the holding
tanks are filled, the tug tows entire barge to Iceberg Industries’ processing plant in Newfoundland, where final
filtering and bottling takes place.

Iceberg Industries went public in 2000, but its two founders still own 15 percent of the company’s stock. In
addition to its line of bottled water, Iceberg Industries has partnered with other Newfoundland businesses to produce
beer (Borealis Iceberg Beer) and vodka (Borealis Iceberg Vodka) with its pure water.

Entrepreneurs in Space.
Since Congress passed the Commercial Space Act, which legalized private manned space flights, in 1997. One
organization, the X PRIZE Foundation, is offering $10 million to the first entrepreneur who can build a spacecraft
that carries three people 62 miles into space twice within two weeks. Although no one has qualified for the $10
million prize yet, some entrepreneurs are not waiting to get into the space tourism business. Space Adventures Ltd.
is booking passengers on a variety of space-related adventure vacations, ranging from terrestrial tours of Meteor
Crater to high-altitude flights in Russian MiG fighter jets. Top Gun wannabes can fly with an experienced pilot at
speeds of up to Mach 2.5 (1,850 miles per hour) and altitudes up to 80,000 feet! Airborne thrills don’t come cheap,
however; prices range from $3,400 up to $13,000. Customers also can experience weightlessness like astronauts in
outer space without ever leaving earth’s atmosphere on the Russian-built Flying Laboratory (nicknamed the “Vomit
Comet”). As the plane flies in a series of parabolic curves, its occupants experience about 25 seconds of zero
gravity.

Space Adventures’ most ambitious project is a sub-orbital space flight that will take adventurers 100 kilometers
into space. The fact that the company does not yet have a vehicle capable of accomplishing this mission has not
slowed down hopeful space travelers. Already, more than 100 people have paid the $6,000 deposit to reserve a spot
on the $98,000 two-hour trip into space. The company has agreements with six of the most promising companies
working to build reusable space vehicles, so Space Adventures customers will be among the first tourist to travel
into space when a vehicle is available.

1. Assume that you are a banker and these entrepreneurs approached you with a loan request to start these
companies. What questions will you ask them? Would you approve the loan? Explain.
Answer: The discussion should focus on the evidence of the viability of these businesses and what
personal commitment the entrepreneurs have in them, i.e., personal investment.
2. Using these business ventures as a source of inspiration, work in a team with two or three of your classmates
to generate ideas for unusual business ventures that you could start.
Answer: Each group will have different idea. Student should consider the market viability of their business
ventures.
3. Select one idea from those your team generated in question 2. What could you do to convince skeptical
lenders or investors to put money into your company and to increase the probability of its success?
Answer: Student’s answer will vary. However, students must understand that in regards to money,
both lenders and investors require solid financial documentations, forecasting the success probability.
 Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 3

B. Choosing entrepreneurship:
1. Have been downsized or laid off 5%
2. Wanted to fulfill lifelong goal 25%
3. Tired of working for someone else 27%
4. Wanted more control over future 36%
5. Joined family business 41%

C. Entrepreneurial profile
1. Desire for responsibility.
a) They prefer to be in control of their resources and to use those resources to achieve self-
determined goals.
2. Preference for moderate risk.
a) Entrepreneurs are not wild risk-takers, but are instead calculating risk-takers.
3. Confidence in their ability to succeed.
a) They need to be optimistic about the chances for success.
4. Desire for immediate feedback.
a) Entrepreneurs like to know how they are doing and are constantly looking for reinforcement.
5. High level of energy.
a) Entrepreneurs are more energetic than the average person. Typically, they work long hours,
often 60 to 80 hours a week.
6. Future orientation.
a) Entrepreneurs tend to dream big and then formulate plans to transfer those dreams into reality.
7. Skill at organizing.
a) Entrepreneurs know how to put the right people and resources together to accomplish a task.
8. Value achievement over money.
a) Achievements seems to be the primary motivating force behind entrepreneurs - money is simply
a way off keeping score off accomplishments.

D. Other characteristics
1. High degree of commitment.
a) An Entrepreneur’s commitment to his or her and the business it spawns determines how
successful his or her company ultimately becomes.
2. Tolerance for ambiguity.
a) Entrepreneurs tend to have a high tolerance for ambiguous, ever-changing situations.
3. Flexibility.
a) Entrepreneurs must be willing to adapt their businesses to meet changes.
4. Tenacity.
a) Successful entrepreneurs have the willpower to conquer the barriers that stand in the way of their
success.

E. Study of business owners by Yankelovich Partners for Pitney Bowes Inc. identified 5 different
entrepreneurial personalities:
1. Idealists.
a) Idealists started their businesses because they had a great idea or wanted to work on something
special.
b) Idealists enjoy creative work but are impatient with performing administrative tasks such as
financial analysis or legal matters.
c) This group of entrepreneurs and their businesses are most dependent on computers.
2. Optimizers.
a) Optimizers (21% of all entrepreneurs) are the second largest category.
b) The benefits of entrepreneurship are most important to them; they enjoy the freedom and
flexibility of owning a business and would not be willing to work for someone else.
4 Section I - The Challenge of Entrepreneurship

c) They want their companies to grow, but their focus is on profits rather than on revenues.
d) These business owners are highly knowledgeable about financial issues and use technology to
keep costs down and productivity up.
e) They worry less than other business owners because they see themselves as maintaining control
over their businesses.
f) They also have learned the secrets of balancing their home and business lives.
3. Hard Workers.
a) Hard workers make up 20% of the entrepreneurial population.
b) They love their work and are more likely than any other group to put in extra hours to achieve
the targets.
c) They tend to be detail-oriented and are the most growth-oriented entrepreneurial group.
d) They are financially aggressive and exercise broad control over the details of running their
businesses.
e) Hard workers typically have long-term business plans and stick to them.
4. Jugglers.
a) Jugglers also make up 20 percent of the entrepreneurial population.
b) They have a difficult time delegating authority and responsibility.
c) They prefer to do things themselves to make sure everything meets their high standards.
d) They are highly energetic people who are good at handling multiple tasks simultaneously.
e) They readily embrace technology in their companies and are always looking for ways to improve
their businesses.
f) Jugglers feel pressure to maintain positive cash flow in their companies.
5. Sustainers.
a) Sustainers comprise 15 percent of all entrepreneurs
b) These entrepreneurs are more likely to have inherited or bought their companies.
c) They are the least comfortable with technology and prefer to put in more time than to figure out
how to apply technology to solve a particular problem.
d) Sustainers are the most conservative group and do not strive to achieve significant levels of
growth.
e) Maintaining a good balance between business and home life is important to them.

III. Benefits and opportunities of small business ownership:

A. Opportunity to gain control over your own destiny
1. Owning a business.
2. Rewards of knowing you are the driving forces behind their businesses.

B. Opportunity to make a difference

1. Opportunity to do what is important to you.
2. Example of Josh Kanuer.
a) “I have no smaller goal than to have a positive impact on our planet and to create a positive
future for my children and the world.”

C. Opportunity to reach your full potential

1. Escape from boring and unchallenging work.
2. Entrepreneurship is a vehicle for self-expression.

D. Opportunity to reap unlimited profits

1. Money is not the primary motivator, but owning your own business is a great way to create wealth.
2. Typical American millionaire is first-generation wealthy, owns a small business and works 45-55
hours a week.
3. Example of John Schnatter.
 Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 5
a) In 1984, Schnatter sold his car, bought used restaurant equipment, and began selling pizzas.
Now, he owns 2,800 stores (most of them franchises) in 49 states and 10 foreign countries,
generating sales in excess of $2 billion a year. His net worth is more than $500 million.

IN THE FOOTSTEPS OF AN ENTREPRENEUR…

The Inca Girl

Stephanie Hirsch, after graduating from college, moved to Los Angeles, where she tried several jobs before taking a
job as a fashion stylist in New York. Hirsch enjoyed the fashion business, but she felt stifled working for someone
else; an entrepreneurial spring was bubbling up inside her.

Hirsch decided to go to Lima, Peru to visit a friend and to celebrate the new year in South America. On several trips
to a festive open-air market in the city, the colorful fabrics and designs that surrounded her overwhelmed Hirsch.
She also drew inspiration from many churches, cathedrals, and spiritual places she visited. While hiking on the Inca
Trail, Hirsch decided to create a business selling fashionable plastic handbags made in the rich, vibrant colors she
had seen on her trip. When she returned to New York, Hirsch, then just 24, designed a line of bags, found a
manufacturer, and launched Inca Girl Enterprises.

Inca Bags became a tremendous hit, showing up first on the arms of celebrities such as Cameron Diaz, Liv Tyler,
Halle Berry, Courtney Cox, Elizabeth Hurley, Cindy Crawford, and many others. Hirsch has expanded Inca Girl’s
product line to include mini skirts, sarongs, belts, beaded bathing suits, and beach mats. The company received a
huge publicity boost when Sports Illustrated used Inca Girl swimsuits on some of its models in the magazine’s
famous “Swimsuit” issue. Inca Girl suits garnered four full pages of coverage in the popular issue.

Hirsch continues to expand her business, selling her products through outlets such as Henri Bendel, Saks Fifth
Avenue, and Bergdorf Goodman as well as through the company’s Web site. Hirsch also runs her company with an
eye on its social responsibility. Through her business, she supports a variety of charitable organizations, including
Hale House and the Doe Fund. Stephanie Hirsch proves that age puts no limit on entrepreneurial ability. Her
creativity and hard work have enabled her to guide her company to more than $3 million in sales.

1. In addition to the normal obstacles of starting a business, what other barriers do young entrepreneurs face?
Answer: Student’s response may vary. Most common answers are lack of funds, low working capital, and
no knowledge of the industry.
2. What factors do you think contribute to a young person taking the risk of starting a business?
Answer: Student’s response may vary.
3. Does Stephanie Hirsch demonstrate the entrepreneurial personality? Explain.
Answer: Student’s response may vary. Most common answers are: Idealists, then optimizer, and finally,
Hard Worker.

E. Opportunity to contribute to society and be recognized for your efforts

1. Often small business owners are among the most trusted and respected members of their
communities.
2. Entrepreneurs enjoy the recognition they get from customers for doing a job well.

F. Opportunity to do what you enjoy doing

1. Their work is not really work; it's their avocation turned into a vocation.
2. Mike Manclark story.
a) Mike Manclark transformed his passion for airplanes and flying into a lucrative business. In
1984 at age 19, with borrowed $3,000, he launched Leading Edge Aviation Services. Leading
Edge now generates more than $26 million in annual sales. “I don’t do this for the money,” he
says. “I do it for the love of airplanes.”

IV. Potential drawbacks of entrepreneurship:

6 Section I - The Challenge of Entrepreneurship

A. Uncertainty of income
1. The regularity of income from working for someone is gone.
2. "The entrepreneur is the last one to be paid."

B. Risk of losing your entire invested capital

1. 34% fail within 2 years.
2. 50% shut down within 4 years.
3. 60% fold within 6 years.
4. Consider the risk-reward trade-off.
a) What is the worst thing that could happen if my business fails?
b) How likely is it that the worst to happen?
c) What can I do to lower the risk that my business will fail?
d) What is my contingency plan for coping if my business fails?

C. Long hours and hard work

1. 10- to 12-hour days and six- or seven-day workweeks with no paid vacations.
2. Owners experience intense, draining workdays.

D. Lower quality of life until the business gets established

1. The workload can take a toll on the entrepreneur’s personal life and family.
2. Most launch their business when they are between 25 and 34, just as their families are starting.
3. Figure 1.2.

E. High levels of stress

1. Running your own business is highly stressful.
2. Failure can mean total financial ruin.

F. Complete responsibility
1. Entrepreneurs end up taking on issues with which they are not knowledgeable.
2. The owner is the business.

G. Discouragement
1. Requires much dedication, discipline, and tenacity.
2. Entrepreneurs will run headlong into many obstacles, some of which may appear to be
insurmountable.
3. Discouragement and disillusionment can set in.

V. Why the boom? The Fuel Feeding The Entrepreneurial Fire

A. Entrepreneurs as heroes
1. Americans have very positive attitudes towards entrepreneurs.

B. Entrepreneurial education
1. More colleges and universities are offering courses; more students see entrepreneurship as a career
option.
2. 1,500 colleges and universities offer courses to 15,000 students.

C. Demographic and economic factors

1. Most start their businesses between ages 25 to 44.

D. Shift to a service economy

1. By 2000, the service sector will produce 90 % of the jobs and 80 %of the GDP in the U.S.
2. The booming service sector has provided entrepreneurs with many business opportunities.
 Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 7

E. Technological advancements
1. Make it easier for entrepreneurs to start and run a business, faxes, computers, voice mail, etc.
2. Example of Scott Adams.
a) Scott Adams, creator of the Dilbert cartoon strip runs his entire business from a home office with a
custom-made desk and a host of high-tech gadgetry.

F. Independent lifestyles
1. Entrepreneurship fits the American life, independence and self-sufficiency.

G. The World Wide Web (WW)

1. Electronic commerce will have grown from $518 million in 1996 and $6.8 billion in 2004.
2. Myriam Zaoui and Eric Malk story
a) Myriam Zaoui and Eric Malka, co-founders of The Art of Shaving, a chain of retail stores selling
shaving products, recently invested $40,000 and eight months developing a Web for their
business which attracted new customers and generated new sales. Web sales now account for 15
percent of The Art of Shaving’s sales.

H. International opportunities
1. 95% of the world's population lives outside of U.S. borders.
2. Small businesses account for 96 percent of all exporters; however, they account for just 20 percent of
total exports.
3. Richard Allred story.
a) Richard Allred launched a company that produces surf-related clothing and apparel. Toes on the
Nose Corporation domestic sales grew quickly, but Allred also saw opportunities to sell his
products in foreign markets such as Australia, Canada, Great Britain, and Japan.

VI. The Cultural Diversity of Entrepreneurship

A. Young Entrepreneurs
1. Generation X, people born between 1965 and 1980, is the most entrepreneurial generation in history.
2. Members of this generation are responsible for 70 percent of all business start-ups!
3. Recent surveys have found that 60 percent of 18-to 29-year-olds say they hope to launch their own
businesses.
4. “Generation X” might be more appropriately called “Generation E.”

B. Women Entrepreneurs
1. Small business has been a leader in offering women opportunities for economic expression through
employment and entrepreneurship.
2. Increasing numbers of women are discovering that the best way to break the "glass ceiling" that
prevents them from rising to the top of many organizations is to start their own companies (see
Figure 1.3).
3. Women are opening businesses at a rate twice that of the national average
4. Women are launching businesses in fields that traditionally have been male-dominated.
5. The 9.1 million women-owned companies across the United States employ 27.5 million workers,
about 20 percent of all company workers in the country.
6. Women own about 38 percent of all businesses, and these companies generate approximately $3.7
trillion in sales each year.

C. Minority Enterprises
1. Asians, Hispanics, and African-Americans, respectively, are most likely to become entrepreneurs.
2. Like women, minorities cite discrimination as a principal reason for their limited access to the world
of entrepreneurship.
3. Studies show that the nation’s minority entrepreneurs own 3.2 million businesses that generate $495
billion in revenues and employ nearly 4 million workers.
8 Section I - The Challenge of Entrepreneurship

D. Immigrant Entrepreneurs
1. Many are lured to the U.S. by its economic freedom.
2. Come with few assets but lots of drive and dreams.
3. Marty and Helen Shih from Taiwan.
4. Mil Kvitchko and Michael Markov story.
a) In 1992, Mik Kvitchko and Michael Markov, migrated from Russia to the United States, started
a business based on a program they had written to help financial advisers evaluate the quality of
investments. Today, Markov Processes International generates more than $1 million in sales.

E. Part-time entrepreneurs
1. Permits people to try it with low-risk.
2. 16 million Americans are self-employed part-time.
3. Use it to "test the waters."
4. Charles Manning, Jr. story
a) Charles Manning, Jr. ran a part-time business: accident investigation, a skill he learned while
serving in the Air Force during the Korean War. In 1980, a full-time business, he worked on
such high-profile cases as the Challenger space shuttle and ValuJet explosions and generates
annual revenues of $3.6 million.

F. Home-based business owners

1. 53% of all businesses are home-based, but about 80 percent of them are very small with no employees.
2. Study reported more than 55,000 home-based businesses generating sales of more than $1 million per
year.
3. The biggest advantage is the cost savings of not having to lease or buy an external location.
4. They also enjoy the benefits of flexible work and lifestyles.
5. Studies suggest that the success rate for home-based businesses is high.
6. Dorn Kennison Story
a) Don Kennison launched his business, DMK Productions, a company that creates 3-D computer
animations and sound effects for a variety of applications, from his kitchen table. His first step was
to create a business plan, and then he began calling on prospective clients. Although Kennison’s
business has experienced tremendous growth, he still runs the company from his home in Simi
Valley, California.
7. Table 1.2 - 18 guidelines home-based entrepreneurs should follow.
Managing a Successful Home-Based Business.
a) Do your homework
b) Find out what your zoning restrictions are
c) Choose the most efficient location for your office
d) Focus your home-based business idea
e) Discuss your business rules with your family
f) Select an appropriate business name
g) Buy the right equipment
h) Dress appropriately
i) Learn to deal with distractions
j) Realize that your phone can be your best friend ... or your worst enemy
k) Be firm with friends and neighbors
l) Take advantage of tax breaks
m) Make sure you have adequate insurance coverage
n) Understand the special circumstances under which you can hire outside employees
o) Be prepared if your business requires clients to come to your home
p) Get a post office box
q) Network, network, network
 Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 9
r) Be proud of your home-based business

G. Family business owners

1. Of the 25.5 million businesses in the United States, 90% are family-owned and managed.
2. These companies account for 60 % of total employment in the United States and generate more than
50% of the U.S. Gross Domestic Product (GDP).
3. 37% of the Fortune 500 companies are family businesses.
4. Only 33% of family businesses survive to the second generation; just 12% make it to the third generation;
and only 3% survive to the fourth generation and beyond.

H. Copreneurs.
1. Entrepreneurial couples who work together as co-owners of their businesses.
2. Companies co-owned by spouses represent one of the fastest growing business sectors.
3. Some of the characteristics they rely on include:
a) personalities that mesh.
b) mutual respect.
c) compatible goals.
d) equal partnership.
e) complementary business skills.
f) open communication.
g) clear division of roles and authority.
h) ability to encourage each other.
i) separate work spaces.
j) boundaries between work and personal life.
k) a sense of humor.
l) may not work with every couple.

I. Corporate castoffs
1. As major U.S. companies have "trimmed their ranks," many of these displaced workers have
launched their own companies.
2. 20% of these managers start their own companies.
3. An entrepreneurial offense is the best defense to corporate layoffs.

J. Corporate dropouts
1. Downsizing has diminished employee loyalties.
2. Many are striking out on their own for more opportunity, better income, and more “job security.”

VII. The Contributions of Small Business

A. Introduction
1. 25.5 million businesses, 98.5% of all businesses in the U.S. would qualify as small businesses.
2. Small business employs more than 52% of the private sector work force.
3. Virtually all job growth in 1990s came from small business, creating 75.8% of new jobs.
4. Small companies bear the heaviest load of training new workers.
5. Small businesses produce 51% of the GDP and 47% of business sales.
6. They also generate 20% more innovations per employee than large companies.
7. See Figure 1.7.

IN THE FOOTSTEPS OF AN ENTREPRENEUR…

Monopoly’s Inventor

Entrepreneurs have exhibited persistence, determination, and courage in the face of adversity. Consider the
following entrepreneur’s story.
10 Section I - The Challenge of Entrepreneurship

In 1934, Americans were suffering from the devastating effects of the Great Depression, which had caused so many
businesses to fail and the unemployment rate to peak at 25 percent. Charles Darrow of Germantown, Pennsylvania
had lost his job as a heating equipment salesman in 1930 and had worked at odd jobs to support his family. During
this down time, he realized that people in the United States needed a diversion from the worries of everyday living.
He developed a board game that allowed players to wheel and deal like the real millionaires of the period. Darrow
called the game “Monopoly” and, unable to finance its production and marketing on his own, he took it to Parker
Brothers, one of the nation’s oldest and best-known game makers. Parker Brothers reviewed the game but rejected
it.

Darrow managed to borrow a small amount of money and with the help of a friend who was a printer, constructed a
few hand-made game sets, which he peddled from store to store. Wanamaker’s Department Store in Philadelphia
placed a consignment order for 5,000 games. They sold quickly, and Monopoly was soon the rage among residents
of the city. The popularity of the game caused Parker Brothers to reconsider its decision, and in 1935, the company
purchased from Darrow the rights to the game. Demand for the game was so strong that Parker Brothers could not
manufacture enough games sets to meet it even though the company was turning out 20,000 sets a week. To date,
more than 200 million Monopoly sets have been sold worldwide, making it one of the most popular games ever
created. The game has been printed in 26 different languages. Charles Darrow never invented another game, but his
legacy lives on through the game that more than 500 million people have played. Darrow became a millionaire from
the royalties he received on the sales of Monopoly.

1. Explain how Charles Darrow exhibits the "entrepreneurial spirit."

Answer: Student’s answer may vary. Some common “entrepreneurial spirit” could be:
commitment, persistent, and believing himself and his product.
2. Is Darrow’s story of continuing to try in the face of failure typical of successful entrepreneurs?
Explain.
Answer: Student’s answer may vary. A common explanation is: wanting to make a difference.

VIII. The Ten Deadly Mistakes of Entrepreneurship

A. Small businesses have a much higher failure rate than larger businesses.
1. 60% will fail in six years.
2. Causes of small business failure
a) limited resources, inexperienced management, and lack of financial stability.

B. Managerial incompetence.
1. Management inexperience or poor decision making ability is the chief problem of the failing
enterprise.
2. The owner-leader lacks the knowledge or ability needed.
3. Andrew Kay story.
a) Andrew Kay was a pioneer in the earliest days of the portable computer with his Kaypro model.
Unfortunately, he had no experience in running a high-tech startup, and, despite the popularity of
his computer, Kay made a series of managerial blunders that ultimately forced the company into
bankruptcy.

C. Undercapitalization.
1. Any successful business venture requires proper financial control.
2. Two pitfalls affecting small business's financial health are common: undercapitalization and poor cash
management.
3. Entrepreneurs tend to be overly optimistic and often underestimate the financial requirements of
launching a business or the amount of time required for the company to become self-sustaining.

D. Poor Cash Management.

1. Insufficient cash flow due to poor cash management is a common cause of business failure.
 Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 11
2. Maintaining adequate cash flow to pay bills in a timely fashion is a constant challenge for small
companies.
3. Poor credit and collection practices on accounts receivable, sloppy accounts payable practices that exert
undue pressure on a company’s cash balance, and uncontrolled spending are common to many small
business bankruptcies.
4. Boo.com story.
a) The founders of Boo.com, a highly publicized Internet clothing retailer, failed to establish adequate
financial controls in the business, and it ultimately caused the company to run out of cash and fold.
Although the company’s sales reached $1.1 million per month, its expenses were running ten times
that amount! The company’s cash drained away, and by the time the company went into bankruptcy.

E. Lack of Strategic Management.

1. Too many small business managers neglect the process of strategic management.
2. Failure to plan, however, usually results in failure to survive.
3. Clearly defined strategy is necessary for creating and maintaining a competitive edge.
4. Building a strategic plan forces an entrepreneur to assess realistically the proposed business's potential.

F. Weak Marketing Effort.

1. Sometimes entrepreneurs believe that if they “build it,” customers automatically “will come.”
2. Stephen Mason and Alan Davis story.
a) Stephen Mason and Alan Davis are cofounders of Catamount Brewery, one of New England’s first
microbreweries. Early on, customers, intrigued by the romance and mystique of microbreweries,
flocked to Catamount’s unique beers. Within six years, Catamount’s production had climbed from
3,500 barrels a year to 12,000 barrels a year. Unfortunately, its marketing efforts did not keep pace.
Sales slipped as customers drifted away, and the company could not generate enough cash to repay
the debt it took on to expand its plant, forcing it into bankruptcy.

G. Uncontrolled growth.
1. They will outgrow their capital base with every 40 to 50% increase in sales.
2. Ideally the business should expand on retained earnings.
3. Growth also requires structural and other changes.
4. The most important change occurs in managerial expertise.

H. Poor location.
1. Location is part art and part science.
2. Owners need to investigate before they locate.
a) It's critical in retail.
3. Keys to location.
a) What it costs.
b) What it generates in sales volume.

I. Lack of Inventory Control

1. Inventory control is one of the most neglected areas in small business.
2. Insufficient inventory levels result in shortages and stockouts causing customers to become disillusioned
and not return.
3. Has too much inventory or has too much of the wrong type of inventory.

J. Inability to Make the “Entrepreneurial Transition.”

1. Many businesses fail when their founders are unable to make the transition from entrepreneur to manager
and are unwilling to bring in a professional management team.
2. Growth requires entrepreneurs to delegate authority.
3. They should avoid micromanaging.
4. Joe Kraus story.
12 Section I - The Challenge of Entrepreneurship

a) Joe Kraus launched the Internet portal Excite (now Excite at Home) and became Excite’s first chief
executive officer. After the company grew, he and his co founders decided that Excite needed
experienced, professional management to guide its rapid growth. Hiring an experienced manger
proved to be a wise move for Excite and for Kraus.

IX. Putting Failure into Perspective

1. It is a natural part of the process. The only way to not fail is to not do anything.
2. Learn from failures and be more successful the next time. It's not mistake avoidance but learning
from mistakes that counts.
3. Entrepreneurship requires persistence and resilience.

IN THE FOOTSTEPS OF AN ENTREPRENEUR…

Tea Time

Seth Goldman and his classmates discussed a case on the beverage industry. One of the topics in professor Barry
Nalebuff’s class that day was which products were missing in the crowded beverage market. “There were too many
sweet drinks and too many bland drinks,” recalls Goldman. After class, professor Nalebuff and Goldman spent time
discussing the types of drinks that might find a profitable niche in the industry.

A few years later, Goldman e-mailed Nalebuff, asking if he would be interested in discussing the possibility of
building a company that would market a drink aimed at filling this niche in the beverage market.

Nalebuff had just returned from a trip to India, where he had researched material for a case study on the tea industry.
Goldman, who had spent time teaching in Russia and China, two cultures in which tea plays an important role, had
learned a great deal about tea in his travels. He knew that tea was the second most popular drink in the world behind
water. Nalebuff came up with the perfect name for the company, Honest Tea. The partners selected five teas for
their initial product line and financed the company with $250,000 of their own money and another $257,000 from
family and friends.

Goldman, who is the company’s “TeaEO,” and Nalebuff have since raised an additional $2.7 million in capital.
Distribution and marketing and distribution continue to present challenges to the small company, however. Honest
Tea focuses on selling its teas through health food stores, gourmet food shops, and restaurants, although some
supermarket chains.

The company’s marketing efforts have been modest, but Goldman and Nalebuff have relied on a strong public
relations effort to generate publicity for their small business. Offering free samples, a common marketing ploy for
many small companies, has proved to be successful, but building name recognition that way can be extremely slow.
Although some beverage industry observers wonder if Honest Tea can build enough market share to become a viable
company in the long run, Goldman and Nalebuff are optimistic. “We saw an opportunity that the bigger companies
did not see,” says Goldman. Plus, we have been a nimble company that can adjust to our customers’ needs.” What’s
next for Honest Tea? “We want to be a national brand,” explains Goldman.

1. Describe the opportunities and the threats facing Honest Tea.

Answer: Student’s answer will vary.

2. On a scale of 1 to 10, how would you rank Honest Tea’s long-term chances of success? Would you be
willing to invest in the company? Explain.
Answer: Student’s answer will vary.

3. What advantages do Honest Tea’s larger competitors have over the small company? What advantages does
Honest Tea have over its larger rivals? How can the company exploit those advantages?
Answer: Student’s answer will vary.

X. How to avoid the pitfalls.

 Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 13
A. Know your business in depth
1. Get the best education and experience before you start.
2. Example of Stephanie Ann.

B. Prepare A Business Plan.

1. Planning replaces "I think" with "I know."
2. Most entrepreneurs don't have a solid plan.
3. Entrepreneurs attempt to build businesses on faulty assumptions.

C. Manage Financial Resources.

1. Develop a practical information system and use it to make decisions.
2. To have adequate startup capital.
3. Estimate capital needed then double it.
4. Cash is your most valuable resource.

D. Understand Financial Statements.

1. These documents are reliable indicators of the small business's health. Know them.
2. Know the financial danger signs to look for.

E. Learn To Manage People Effectively.

1. Your hires will determine where your company will go.
2. Share information.

F. Set your business apart from the competition

1. Differentiate your company and products.
2. Convince your customers that you are different from competitors.
3. For small companies, that basis often is customer service, convenience, speed, quality, or whatever
else is important to attracting and keeping happy customers.

G. Keep in tune with yourself.

1. Requires lots of energy and enthusiasm.
2. Manage yourself.
3. Keep a positive attitude.
4. Keep your passion.

Chapter Summary
1. Define the role of the entrepreneur in business--in the United States and across the globe.
 Record numbers of people have launched companies over the past decade. The boom in entrepreneurship
is not limited solely to the United States; many nations across the globe are seeing similar growth in the
small business sector. A variety of competitive, economic, and demographic shifts have created a world in
which "small is beautiful."
 Society depends on entrepreneurs to provide the drive and risk-taking necessary for the business system
to supply people with the goods and services they need.

2. Describe the entrepreneurial profile.

 Entrepreneurs have some common characteristics, including a desire for responsibility, a preference for
moderate risk, confidence in their ability to succeed, a desire for immediate feedback, a high energy level,
a future orientation, skill at organizing, and a value of achievement over money. In a phrase, they are high
achievers.

3. Describe the benefits and opportunities of owning a small business.

 Driven by these personal characteristics, entrepreneurs establish and manage small businesses to gain
control over their lives, become self-fulfilled, reap unlimited profits, contribute to society, and do what
they enjoy doing.
14 Section I - The Challenge of Entrepreneurship

4. Describe the potential drawbacks of owning a small business.

 Small business ownership has some potential drawbacks. There are no guarantees that the business will
make a profit or even survive. The time and energy required to manage a new business may have dire
effects on the owner and family members.

5. Explain the forces that are driving the growth in entrepreneurship.

 Several factors are driving the boom in entrepreneurship, including the portrayal of entrepreneurs as
heroes, better entrepreneurial education, economic and demographic factors, a shift to a service economy,
technological advancements, more-independent lifestyles, and increased international opportunities.

6. Discuss the role of diversity in small business and entrepreneurship.

 Several groups are leading the nation's drive toward entrepreneurship: women, minorities, immigrants,
"part-timers," home-based business owners, family business owners, copreneurs, corporate castoffs, and
corporate dropouts.

7. Describe the contributions small businesses make to the U.S. economy.

 The small business sector's contributions are many. They make up 99 percent of all businesses, employ 53
percent of the private sector workforce, create 75.8% of the new jobs in the economy, produce 51 percent
of the country's private Gross Domestic Product (GDP), and account for 47 percent of business sales.

8. Explain the reasons small businesses fail.

 The failure rate for small businesses is higher than for big businesses, and profits fluctuate with general
economic conditions. SBA statistics show that 60 percent of new businesses will have failed within six years.
The primary cause of business failure is incompetent management. Other reasons include poor financial
control, failure to plan, inappropriate location, lack of inventory control, improper managerial attitudes, and
inability to make the "entrepreneurial transition."

9. Put business failure into the proper perspective.

 Because they are building businesses in an environment filled with uncertainty and shaped by rapid change,
entrepreneurs recognize that failure is likely to be a part of their lives; yet, they are not paralyzed by that fear.
Successful entrepreneurs have the attitude that failures are simply stepping stones along the path to success.

10. Explain how small business owners can avoid the major pitfalls of running a business.
 There are several general tactics the small business owner can employ to avoid failure. The entrepreneur
should know the business in depth, develop a solid business plan, manage financial resources effectively,
understand financial statements, learn to manage people effectively, set the business apart from the
competition, and keep in tune with yourself.

Discussion Questions
1. What forces have led to the boom in entrepreneurship in the United States?
Answer - Corporate downsizing flooding the market with corporate cast-offs, an attitude that small is beautiful,
international economic development due to the fall of communism and the “capitalization” of former state-owned
industries, a dream of freedom and independence, perseverance in achieving results, and the opportunities
presented by an ever-changing environment.

2. What is an entrepreneur? Give a brief description of the entrepreneurial profile.

Answer - One who creates a new business in the face of risk and uncertainty for the purpose of achieving profit
and growth by identifying opportunities and assembling the necessary resources to capitalize on them. Profile - a)
desire for responsibility, b) preference for moderate risk, c) confidence in personal success, d) desire for immediate
feedback, e) high level of energy, f) possess a future orientation, g) skill in organization, h) money is a great way
to keep score but it is not as important as achievement.

3. Inc. magazine claims, “Entrepreneurship is more mundane than it’s sometimes portrayed . . . you don’t need to be
a person of mythical proportions to be very, very successful in building a company.” Do you agree? Explain.
Answer - will vary according to the student.
 Chapter 1 - Entrepreneurs: The Driving Force Behind Small Business 15
4. What are the major benefits of business ownership?
Answer - a) opportunity to gain control over your destiny, b) opportunity to make a difference, c) opportunity to
reach your full potential, d) opportunity to reap unlimited profits, e) opportunity to make a contribution to society
and receive recognition for your efforts.

5. Which of the potential drawbacks to business ownership are most critical?

Answer - Student's responses will vary but should cover the following drawbacks: a) uncertainty of income, b)
risk of losing invested capital, c) long hours and hard work, d) lower quality of life until the business gets
established, d) complete responsibility.

6. Briefly describe the role of the following groups in entrepreneurship: women, minorities, immigrants, “part-
timers,” home-based business owners, family business owners, copreneurs, corporate castoffs, and corporate
dropouts.
Answer -

7. What contributions do small businesses make to our economy?

Answer - There is no set definition of a small business. SBA criteria vary by industry, see page 36. 98% of U.S.
businesses could be considered small. They’ve contributed almost all of the recent job growth, employ over 50%
of the private workforce, and contribute 48% of our GNP and 42% of all business sales.

8. Describe the small business failure rate.

Answer - The failure rate for small businesses is higher than for big businesses. Based on data released from SBA, 60
percent of new businesses fail within six years. The primary reason is incompetent management. Other reasons are
poor financial control, failure to plan, inappropriate location, lack of inventory control, improper managerial attitudes,
and inability to make the "entrepreneurial transition."

9. Outline the causes of business failure. Which problems cause most business failures?
Answer - Management incompetence - This one causes the most problems. The manager lacks the capacity to
operate a small business successfully. Lack of experience - Many owners who start businesses in fields in which
they have no prior experience fail. Some owners lack the right kind of experience. Poor financial control -
Undercapitalization - Starting the business on a "shoestring"--often leads to failure. Lack of strategic planning -
Too many owners neglect it because they think it only benefits large companies. Uncontrolled growth - Growth is
natural and healthy, but unplanned growth can be fatal to the business. Inappropriate location - Owners who
choose a business location without proper analysis, investigation, and planning often fail. Too often, owners seek
"cheap" sites and locate themselves straight into failure. Lack of inventory control - Although inventory is
typically the largest investment for the owner, inventory control is one of the most neglected duties. The result is
loss through crime and pressure on cash flows from handling the wrong items. Inability to make the
“entrepreneurial transition” - Having started the business, some entrepreneurs lack the ability to manage it when it
gets larger and fail to turn it over to a different management team.

10. How can the small business owner avoid the common pitfalls that often lead to business failure?
Answer - Doing the following will help to avoid pitfalls. a) know the business in depth, b) prepare a business
plan, c) manage financial resources, d) understand financial statements and know how to use them, e) learn to
manage people effectively, f) keep in tune with yourself.

11. Why is it important to study the small business failure rate?

Answer - It provides a realistic picture for potential entrepreneurs to consider prior to their launching of their
businesses. It provides understanding of why businesses fail and offers insight into ways to prevent it.

12. Explain the typical entrepreneur's attitude toward failure.

Answer - He/she learn from the mistakes and tries again. He/she takes moderate, considered risks, has a positive
upbeat attitude, and doesn't avoid failure; he/she learn from it.

13. One entrepreneur says that too many people "don't see that by spending their lives afraid of failure, they become
failures. But when you go out there and risk as I have, you'll have failures along the way, but eventually the result
is great success if you are willing to keep risking. For every big yes in life, there will be 199 nos." Do you agree?
Explain.
16 Section I - The Challenge of Entrepreneurship

Answer - Students' responses will vary.

14. What advice would you offer an entrepreneurial friend who has just suffered a business failure?
Answer - Students' responses will vary but the advice should include a reality check, long hours, high failure rate,
and a dose of the positive, persist, learn, don't give up.

15. Noting the growing trend among collegiate entrepreneurs launching businesses while still in school, one educator says,
“A student whose main activity on campus is running a business is missing the basic reason for being here, which is to
get an education.” Do you agree? Explain.
Student’s responses will vary.

Step into the Real World

1. Choose an entrepreneur in your community and interview him or her. What's the "story" behind the business?
What advantages and disadvantages does the owner see in owning a business? What advice would he or she offer
to someone considering launching a business?

2. Search through recent business publications (especially those focusing on small companies such as Inc., Entre-
preneur, Business Start-Ups, Nation's Business, or Your Company) and find an example of an entrepreneur--past or
present--who exhibits the entrepreneurial spirit of striving for success in the face of failure as Gail Borden did.
Prepare a brief report for your class.

3. Select one of the categories under the section "The Diversity of Entrepreneurship" in this chapter and research it in
more detail. Find examples of the entrepreneurial profile. Prepare a brief report for your class.

4. Interview a local banker who has experience lending to small companies. What factors does he or she believe are
important to a small company's success? What factors has he or she seen to cause business failures? What does the
lender want to see in a business start-up before agreeing to lend any money?