Entrepreneurs and Ideas: The Basis of Small Business

Transcription

1 1PART ONE Entrepreneurs and Ideas: The Basis of Small Business CHAPTER 1: Small Business: Its Opportunities and Rewards CHAPTER 2: Small Business Ethics: A Key to Long-Term Success CHAPTER 3: Small Business Entrepreneurs: Characteristics and Competencies CHAPTER 4: Small Business Ideas: Creativity, Opportunity, and Feasibility

2 CHAPTER 1 Small Business: Its Opportunities and Rewards Aaron McGruder and his creations. How did his passion for becoming a cartoonist help him break into the business? THE BOONDOCKS 2005 Aaron McGruder. Dist. By UNIVERSAL PRESS SYNDICATE. Reprinted with permission. All rights reserved.

3 LO This chapter will help you: LO1 Understand the scope of small business in the United States. LO2 Learn the differences between small businesses and high-growth ventures. LO3 Discover the rewards entrepreneurs can achieve through their businesses. LO4 Be able to dispel key myths about small businesses. LO5 Identify actions key to becoming a small business owner. LO6 Understand how small businesses are important to our economy and your community. LEARNING OBJECTIVES Focus on Small Business: Aaron the Cartoonist 1 Aaron McGruder loved to draw cartoons. He was born in Chicago, and at age 6 he moved with his family to Columbia, Maryland, near Washington, DC. With the support of his parents, he kept drawing through his teenage years. At age 18 he went to the nearby University of Maryland, sketchbook in hand, and for the next three years he worked on refining his cartoons and completing his major in African American studies. While in college, he realized he was passionate about becoming a professional cartoonist. He did a research paper in which he identified America s fewer than a dozen professional African American cartoonists. He learned that most professional cartoonists were self-employed, with their work distributed to newspapers by one of the big syndicates. Knowing that breaking into the cartooning business was going to be extremely difficult, he decided that he needed to perfect his cartoons but also establish himself in the business of cartooning. McGruder started publishing his cartoons on a Web site called The Hitlist Online, in 1996; then in 1997 he had them published in The Diamondback, an independent student newspaper at the University of Maryland. Later that year he was published in The Source, a magazine aimed at the urban music scene. While Aaron s cartoons were published, he kept working on his art. This was his form of pilot testing. He adapted his art. Based on feedback from his readers and editors, Aaron improved his comics. For example, the characters changed a lot from The Hitlist Online versions to those seen the following year in The Diamondback, and again when his work was syndicated through the United Press Syndicate. On the business side, he leveraged himself. Aaron convinced a writer at Editor & Publisher, the trade paper for the newspaper industry, to build a story from his research paper on African American cartoonists. The story gave him national visibility among the publishers who would be signing the checks for his comic strip. With his visibility increasing, he networked. McGruder approached the syndicates by mail and in person. He went to the National Association of Black Journalists convention in Chicago in

4 4 PART 1 Entrepreneurs and Ideas: The Basis of Small Business 1997 and met a representative from Universal Press Syndicate (UPS) the company that picked up the strip. Perhaps most significantly, he also knew when to get help. When UPS expressed interest, he handed over the negotiations to an attorney (another lesson learned from the research paper), and he was able to keep virtually all the rights to the strip and its characters. The payoff? You can say he did all right. The Boondocks began syndication in 160 papers in 1999, outdoing the previous superstar strips Doonesbury and Calvin and Hobbes. The strip grew in popularity and controversy appearing in more than 350 newspapers, and spawned several comic strip compilation books and a Cartoon Network TV series in With the cable series in place and a new year of episodes starting in June 2007, Aaron closed down the newspaper strip in March In the comic strip and the television series, Aaron is positioned to make more money from these than the typical cartoonist because he made sure he held onto ownership of more of the rights to his strips and characters than cartoonists typically do. He admitted to an income in the six-figure range for his first year of syndication, before merchandising or book sales kicked in. Not bad for a one-person firm start-up working from his bedroom in his parents house in Columbia, Maryland. DISCUSSION QUESTIONS 1. How did Aaron move what was his passion and hobby into a viable business? 2. What did Aaron do to develop his skills as a cartoonist? 3. What kinds of research did Aaron use to understand the cartooning industry? 4. What kinds of help did Aaron use to develop his business? LO1 Understand the scope of small business in the United States. small business Involves 1 50 people and has its owner managing the business on a day-to-day basis. entrepreneur A person who owns or starts an organization, such as a business. The Role of Help in Starting a Small Business Aaron s story makes a simple point you can start a small business, and knowledge can help. Aaron did it the right way doing research, planning, networking, and seeking help when he needed it. By reading this book for a class, you too are approaching small business the right way, and it will make a difference. By taking a course in small business or entrepreneurship, you are increasing your chances for success. At any moment, about half the adults in the United States think about owning their own business, but only one person in eleven who thinks about it actually starts a business. 2 Even at that small a rate, there are over 1 million new businesses in the United States each year. 3 There are two hurdles that people need to overcome to move from thinking to achieving. One of these is moving from inaction to action. According to Stanford University professors Gerry Salancik and Bob Sutton, 4 inaction is the natural state of most people, and potential entrepreneurs are no exception. Only one person in seven of those who think about starting a business (around 7 percent of the population) make any kind of effort to turn their intentions into reality. Reading a book, or better yet taking a course, goes a long way toward getting you past the first hurdle of inaction. The second hurdle is taking the right actions. You need to find out what you need to do to start a business and how to do what you need to do. Skill Module 1.1 helps you learn more about these key resources. Small business and entrepreneurship classes or consulting advice from experts can help you get what you need. The goal for courses like the one you are taking and textbooks like this one is to get you the information you need to be successful. We know that help helps.

5 Small Business: Its Opportunities and Rewards CHAPTER 1 5 The Small Business Online Scavenger Hunt It can be mind-boggling to discover how much material is out on the Web ready to help aspiring entrepreneurs. To help you get a feel for what is out there, we have put together a Web Scavenger Hunt focusing on key information. In a few cases like NFIB.org you may have to register, but all registrations for Web sites listed here are free. Along the way you will get to peruse some of the best of the best entrepreneurship information on the Web. 1. Which two entrepreneurship magazines have a section dedicated to franchising right on the home page? Your choices: (Fortune Small Business), If you wanted to find stories about business in Alburquerque (or run the name of a business from there to see what they have done), which site would give you the biggest selection of local stories? (The Wall Street Journal ) 3. Several sources have information categorized by industry, but if you need to know about the laws and regulations for an industry, which is your best online bet? Which of the following offers a free online business planner on its home page? Which of the following offers free downloadable business forms clickable from the home page? Which site does NOT have relevant small business information organized by state? Who does NOT offer online videos about small business topics? Find Google s hidden gems list of services and use the Google Directory to search for business association. Are there around 5,000, 15,000, 50,000, or 500,000? 9. You can search for patents for free at or Which will also let you search for trademarks? 10. If you want to find out what the profit margins are for businesses in say the restaurant industry, which site would give you the answer? By the time you have checked out these sites, you will be up to speed on some of the largest and most credible sets of free, high-quality small business information available today. SKILL MODULE 1.1 The Small Business Administration reports that about two-thirds of new firms with employees survive four years, and for owner-only firms the rate is 50 percent surviving four years. 5 But people who get help do better! More than 81 percent of the clients of Small Business Development Centers were still going after five years, 6 and 87 percent of firms getting help in incubators were still going at four years. 7 The studies with college students in small business and entrepreneurship classes show similar results for programs in the United States 8 and elsewhere. 9 Small business knowledge means small business success. In this chapter we introduce you to small business, including the specialized language and knowledge models of small business, and we take a look at people involved in small business today. Our goal for this book is to give you the ability to see small business as it really is. Defining a Small Business According to the U.S. Small Business Administration, there were 25.8 million small businesses in the United States in Small business can be defined in different ways. The U.S. government agency that helps people start businesses is the Small Business Administration or SBA. It categorizes a business in the United States as small if it has fewer than 500 Small Business Administration A part of the United States government which provides support and advocacy for small businesses. Small Business Development Center Offices co-sponsored by states and the federal government that offer free or low-cost help to existing and potential small businesses. incubator A facility which offers subsidized space and business advice to companies in their earliest stages of operation.

6 6 PART 1 Entrepreneurs and Ideas: The Basis of Small Business small and medium enterprise The international term for small businesses. independent small business A business owned by an individual or small group. owner-manager The individual who owns and runs a business. novelty Characterized by being different or new. imitative Characterized by being like or copying something that already exists. self-employed Working for yourself. founders People who create or start new businesses. franchise A prepackaged business bought, rented, or leased from a company called a franchisor. buyers People who purchase an existing business. heir A person who becomes an owner through inheriting or being given a stake in a family business. LO2 Learn the differences between small businesses and high-growth ventures. employees. 11 The international community uses the term small and medium enterprise, or SME, instead of small business. Among SMEs, small enterprises have 1 to 50 people, while medium enterprises have 51 to 500 people. This text focuses on owner-managed small businesses of 1 50 people and places greater emphasis on the lower end of the range. Our focus is also primarily on independent and owner-managed small business. Independent means that the business is owned by an individual or small group rather than existing as part of a larger enterprise or a business whose stock can be bought on an exchange. Owner-management refers to constant or at least daily management of a business by its owner. It is possible to become an absentee owner, who profits from a business but is not involved in its day-to-day operations. This, however, is a different type of business with different problems from those of firms run by an owner-manager. Absentee businesses are not the focus of this text. Small Business Owners and Entrepreneurs Truly entrepreneurial businesses are characterized by novelty, in their products, services, or business models. Small businesses, on the other hand, are imitative in nature, with most small firms doing what other firms do, with only slight variations. But when we think about the people who start firms for the first time, the situations they face are situations of novelty. So whether they start the successor to Amazon.com or the pizzeria on the corner, the person who starts a business is living the life of the entrepreneur. We recognize this distinction and address the challenges facing entrepreneurs, while focusing on the small businesses they plan to create or enter. In Entrepreneurial Small Business we use the popular broad definition of entrepreneur 12 anyone who owns a business is an entrepreneur. This, of course, means anyone who is a small business owner is an entrepreneur. 13 It also means that the selfemployed, anyone who works for himself or herself instead of for others, is also an entrepreneur. According to the Census Bureau, there were about 16.3 million self-employed people in Within the population of entrepreneurs, it is sometimes useful to split out certain groups. One of these is founders, the people who start a business, whether it is one of their own devising, or a franchise, which is a prepackaged business you buy or lease from a franchisor. Another group consists of buyers, those who purchase an existing business, or heirs, who inherit or are given a stake in the family business. These roles deal with the entry stage of the business from the perspective of the entrepreneur. After entry, another role emerges, that of the owner-manager, the role in which most entrepreneurs spend their working lives. Throughout this text the terms small business owner, entrepreneur, and self-employed are used interchangeably. When founders or buyers or postentry owner-managers are discussed, we specify which one is the focus. Small Businesses vs. High-Growth Ventures You ve probably heard of Dell Computer s founder Michael Dell. He is a billionaire and famous for the business he built. But did you know that Dell Computers wasn t the first business he started? Before he was 10 years old, Dell started selling collectible stamps through the mail. 14 He typed his catalog one key at a time since he had never learned to type, and he made $2,000. His next business was selling newspaper subscriptions by phone from home; he made $18,000 on this venture. His third business was reselling IBM PCs from his dorm room at the University of Texas at a time when IBM was trying to limit sales to official IBM dealers like Sears and IBM s own personal computer stores. 15 It was Michael s fourth business, selling PCs, that led to the Dell Computer we know today. Michael Dell s four businesses point up the difference between small businesses and high-growth ventures. Both may be small when they start. However, small businesses are usually intended to remain small, generally a size that the owner feels comfortable controlling personally. For Michael Dell, his stamp, newspaper, and IBM PC resale businesses were designed to be small-scale operations that he could handle alone. He did everything himself, and he worked when he wanted to. The businesses were fairly conventional, with dozens or even hundreds of competitors all imitating one another.

7 Small Business: Its Opportunities and Rewards CHAPTER 1 7 High-growth ventures start small but are intended to grow rapidly, often requiring a team of partners or managers to handle the growth. When Dell got serious about the upgraded PC business, he created a company and started hiring others to help out. He moved from his dorm room to a commercial location, kept open regular hours, and started thinking about putting together a much bigger operation. That much bigger operation is the Dell Computer known worldwide today. While the computer business as a whole was established, Dell s approach to assembly from highly standardized (and therefore low-cost) parts was fairly revolutionary, as was his use of mailorder and later telephone and Web-based ordering. In his fourth business, Dell led the industry, and others imitated him. The differences between small businesses and high-growth ventures aren t just semantic. They re fundamental. Table 1.1 shows the differences between small businesses and high-growth ventures. People starting high-growth ventures need to know how to seek and obtain external financing, particularly venture capital. They also need to know how to dominate the market and grow dramatically and quickly, according to the schedule of investors or as the market will allow. High-growth venture founders would ultimately want to know how to cash out through the sale of an initial public offering of stock or through the sale of the company to a larger company or set of investors. The knowledge needed for a small business focuses on how to start small, with resources from the owner, family, and friends. A key type of knowledge would be how to grow on the schedule set by and for the purposes of the owner, not outside investors. Michael Dell is well-known now as the CEO of Dell Computer, a major industry leader in PC production. Before his success, though, Dell spearheaded at least three other much smaller businesses. What factors do you think led to Dell s decision to expand his earlier ventures and eventually to his successful capturing of the PC market? TABLE 1.1 Differences between Small Businesses and High-Growth Ventures Small Businesses High-Growth Ventures Preferred funding source Owner s own money Other people s money When the firm s in trouble Cut costs Sell more What s more important Sales Marketing Personal control preference Retain autonomy Involve key others Focus Efficiency Effectiveness Metastrategy Imitation Novelty External control preference Control firm Control market Grow When necessary When possible Human resources Personalize Professionalize Acceptance Personal validation External legitimacy What limits growth Loss of control Market response Delegation orientation Delegation is difficult Delegation is essential

8 8 PART 1 Entrepreneurs and Ideas: The Basis of Small Business FIGURE 1.1 The Dynamic Capitalism Typology innovativeness Refers to how important a role new ideas, products, services, processes, or markets play in an organization. potential for growth Refers to the potential market size. Dynamic Capitalism Typology A model of an economy categorizing businesses based on their innovativeness and growth rate. economic core sector The most numerous and most widely available type of firm, also called small business, ranging from low to moderate levels of innovation and growth. glamorous sector Consists of firms with high growth and high innovation. These are among the most visible firms in the media. high-growth venture Firms with exceptionally high innovativeness and growth rates, making them candidates for possible venture capital funding. ambitious firm sector Consists of franchises and multisite firms, with low to moderate innovation and high levels of growth. resource constrained sector Consists of firms high in innovation but low in growth rate due to a lack of resources. LO3 Discover the rewards entrepreneurs can achieve through their businesses. HIGH INNOVATION LOW RESOURCE CONSTRAINED Inventors ECONOMIC CORE Small Businesses LOW GROWTH RATE GLAMOROUS Microsofts AMBITIOUS Franchises & Multisite Firms High Growth Ventures The key market knowledge for a small business focuses on its immediate marketplace and communities. Knowing about how to achieve maximum flexibility while pursuing a comfortable level of sales, growth, and profit is also part of this outlook. This flexibility might be used to return something to the community, to become totally invested in the product or service, to have time to spend with one s family or on one s self, or some other purpose. Businesses worldwide are evaluated on their innovativeness and growth potential. Innovativeness refers to how important to a firm are new ideas, products, services, processes, or markets. Potential for growth refers to the eventual size of the market, which can range from a small, local, or niche market to something used by millions or even billions. Rating firms high or low on these two measures helps identify the different types of businesses in what is called the Dynamic Capitalism Typology. 16 As you see in Figure 1.1 small businesses form the economic core of our society. This is because these are the most numerous and most widely available type of firm. Small businesses range from low to moderate levels of innovation and growth. At the other extreme is the glamorous sector of high growth and high innovation firms, like Microsoft. Within this box is a subset of only about 12,000 firms which make up the high-growth ventures we have been describing. The other two sectors include the ambitious firm sector, made up of franchises and multisite firms, who are generally not very innovative, but are designed for high levels of growth, and the resource constrained sector, made up of inventors and research and development firms (and even universities) which have lots of innovative ideas but lack the funds to bring them to market. To give you a sense of the difference between high-growth ventures and the rest of the field of small business, note that the Global Entrepreneurship Monitor reported that in 2003 high-growth venture firms represented percent of all firms in the world and received a total of $32 billion in venture capital. Meanwhile, the other percent of firms in the world represented $364 billion invested through informal channels such as personal investments, family, and friends. That $364 billion represented 91.8 percent of all funding, and the firms in that market represent not only the economic core of world economies, but also the focus of Entrepreneurial Small Business. Our goal is to give you the knowledge you need to be successful in small business, to help you get started the smartest way possible, and to manage your business to achieve your personal rewards. Rewards for Starting a Small Business Why become an entrepreneur? If you said, For the money, or, To do things my way, you d be right, but these are only a few of the reasons behind owning your own firm. We know that people go where they feel they have the best chance of HIGH

9 Small Business: Its Opportunities and Rewards CHAPTER 1 9 THE THOUGHTFUL ENTREPRENEUR Paul Reynolds and the PSED 17 As a sociology professor, Paul Reynolds realized that accurate information about new small business owners was in short supply. Unfortunately, those prospective or new owners are scattered all over the country and are often hard to find. Turning them up would take a major and expensive effort. To get this done, Paul became an entrepreneur in his own right, creating a partnership called the Entrepreneurship Research Consortium which in turn created the Panel Study of Entrepreneurial Dynamics (PSED). This partnership was itself a small business that initially involved nearly 30 different institutions as investors and over 100 academics and policy makers as advisers. 18 Armed with money and expertise, Paul s team developed a technique to find and survey a random sample of people in the United States in order to find those few in the process of starting a business. The resulting survey and sampling was considered by experts to be one of the best small business studies ever done. The initial sample was of 31,261 people, and among these people, 2,024 (about 6.5 percent) were starting or had just started businesses. To keep the survey costs reasonable, the PSED team surveyed 871 people from those who were starting or had recently started small businesses. It surveyed these people every 18 months to see how they and their businesses fared. It looked at whether the business was operating or growing. It also looked at hiring, financing, exporting and sources of help used. The result is the most careful, detailed, and long-term look anyone has ever taken at the process of starting small businesses. Because of this, statistics from the PSED are used throughout this text to help you understand small business as it really is. 19 For Paul Reynolds, the PSED led to an even more ambitious undertaking, the annual Global Entrepreneurship Monitor, which surveys small business conditions in over 40 countries (see For his achievements, in 2004 Paul was awarded small business s equivalent of the Nobel Prize, Sweden s FSF-Nutek International Award for Small Business and Entrepreneurship Research. Paul s example shows how entrepreneurial thinking can solve all kinds of problems. getting the rewards they value most. 20 The kinds of rewards people report are also fairly well known based on results reported from the Panel Study of Entrepreneurial Dynamics (see The Thoughtful Entrepreneur Box: Paul Reynolds and the PSED). The rewards mentioned by people in the process of starting their own firms are listed in Figure 1.2. Nearly all entrepreneurs talk about three key rewards flexibility, a livable income, and personal growth. These are covered in more detail below. There are two other rewards building great wealth and creating products, which entrepreneurs mention more often than working people in general. There are also rewards that entrepreneurs mention less often than working people in general. These are social rewards, like the respect or admiration of others, or power over others, and family rewards, like continuing a family tradition in business. Those items are marked with an asterisk (*) in Fig These go it alone tendencies are probably a good thing, because they help entrepreneurs keep some distance from others and pursue what they think is right. The three most popular types of rewards for small business owners are growth, flexibility, and income. Growth rewards are what people get from facing and beating or learning from challenges. Self-professed computer nerd Marc Fleury s first venture went under with the dot-com bust. 21 His second business, The JBoss Group, was built around the challenges of going it alone financially while outperforming and outlasting his first venture. JBoss, which sells programming and support services, was successful from day one, and is still going strong. And it is still entirely self-funded. growth rewards What people get from facing and beating challenges.

10 10 PART 1 Entrepreneurs and Ideas: The Basis of Small Business Universally Mentioned Rewards Flexibility: To have greater flexibility for my personal and family life. Income: To give myself, my spouse, and my children financial security. Growth: To continue to grow and learn as a person. Occasionally Mentioned Rewards Rarely Mentioned Rewards Wealth: To have a chance to build great wealth or a very high income. Product: To develop an idea for a product. Recognition:* Admiration:* Power:* Family:* To achieve To be respected To lead and To continue a something and by my friends. motivate others. family tradition. get recognition for it. * Items entrepreneurs mention much less often than people in general. FIGURE 1.2 Rewards New Entrepreneurs Seek Through Small Business 22 income rewards The money made by owning one s own business. flexibility rewards The ability of business owners to structure life in the way that suits their needs best. LO4 Be able to dispel key myths about small businesses. Income rewards refer to the money made from owning your own business. For more than three-quarters of entrepreneurs, this means seeking to match or slightly better the income you had before you started your own business. Only one entrepreneur in four says that she or he is seeking high income through her or his business. But entrepreneurs are looking in the right place. More than 75 percent of the millionaires in the United States are entrepreneurs. 23 Two-thirds of the millionaires are business owners, and one-third are self-employed professionals like doctors, lawyers, or therapists. Flexibility rewards are perhaps the most rapidly growing type of reward. They refer to the ability of business owners to structure their lives in the way that best suits their needs. When Cyndi Crews was laid off from her work as an Information Technology resources manager of a large corporation, she bought a franchise of Schooley Mitchell Telecom Consultants. Today she advises companies on how to get the most from their telephone systems. She runs the business from her home in Lumberton, Texas, where she is able to set her own work schedule. This ensures her the flexibility she needs to take time off to be with her young son and husband. 24 Another variant of this is pursuing spiritual or religious goals through business. For example, Noah s Ark, a Kosher deli with branches in Teaneck, New Jersey, and New York City closes from 4 P.M. on Friday until 6:30 P.M. or so on Saturday night in observance of the Jewish Sabbath. Myths about Small Businesses Here is a sobering truth. At any moment about half the people in the United States are thinking about owning their own business, but only one in eleven of those people with self-employment ideas actually starts his or her own business. 25 The challenges of small business scare off or derail people. For years potential entrepreneurs have mentioned problems like these:

11 Small Business: Its Opportunities and Rewards CHAPTER 1 11 Companies like Wells Fargo attempt to attract potential small business owners as clients for their financial services. What are some of the advantages and disadvantages to this traditional way of raising capital? To more innovative options? There s not enough financing to start businesses. You need to make something (or something high tech) if you re going to make money. Seventy percent (or 80 percent or 90 percent) of all new businesses fail within two years. Over the past 10 years small business experts in academia and government have studied small business and potential entrepreneurs and learned that a lot of the challenges scaring people away from small business are the stuff of urban legends. Let s look at these three problems with the latest information. 1. There is not enough financing to start businesses: For decades when small business owners were asked what the greatest challenge was facing their business, the answer was a lack of financing. So it is only natural for people thinking about starting their own firms to assume that a lack of money will be their greatest challenge. In the PSED, financial problems and difficulty raising capital are reported as problems by the people who are in their earliest stages of starting their firms, but for those farther along in the firm creation process, financial concerns fall behind problems such as finding customers or good employees or the time to get everything done. The word must be getting out. In a recent survey of Small Business Problems and Priorities, financing issues were ranked 66th and 69th. 26 In a 30-nation 2002 Global Entrepreneurship Monitor (GEM) study, Americans reported that financial support was not

12 12 PART 1 Entrepreneurs and Ideas: The Basis of Small Business THE THOUGHTFUL ENTREPRENEUR Financing Tips from Entrepreneur Magazine s 2004 Young Millionaires Every year Entrepreneur magazine features a group of new businesses started by people under age 40. Although all the businesses are successful when they make it to the magazine, for the most part their owners had to work hard, sacrifice a lot, and be creative in their tactics to survive long enough to be successful. One place where their creativity is most evident is in the ways they funded their business. Of the fifteen firms listed by Entrepreneur in 2004, nine firms gave information on how they financed their start-ups. Six of the nine mentioned personal savings and some fairly well-known approaches such as: Borrowing from family and friends. Getting a line of credit from a bank. Getting a bank loan (with SBA loan guarantees, and without). Getting venture capital money. Getting seed investment money from angel investors. Getting money from a private placement (a specialized equity offering to professional investors). But many of these entrepreneurs also mentioned more creative approaches to raising or saving money. Examples these young millionaires gave from their early days included: Replacing their car with a cheaper one and putting the extra money in the business. Doing the same with a home. Taking out a mortgage on their home. Consulting on the side to raise money for the start-up. Deferring payments to creditors. Using credit cards to finance the business. Living in the office to save on apartment rent. Their stories match up reasonably well with the findings from the GEM and other studies. If you start with your own savings and work hard and creatively look for and manage money, you too can finance your business. a problem, but they also reported that they d like to see even more financial support available. 27 Looking at Entrepreneur magazine s 2004 crop of young millionaires (in The Thoughtful Entrepreneur Box), you can see an example of the wide variety of techniques used to fund fledgling firms. 2. You need to make something (or make something high tech) to make money: If you look at TV and read magazines, you might think that high-tech businesses and manufacturing are the only ways to do well in your own business. But these days service industries represent the single biggest business sector in terms of the number of businesses, the number of people employed, and the amount of revenue generated. Forty million of the 110 million people working in the United States in 2001 worked in service industries. 28 The creation of intellectual property in the forms of reports, artistic works, databases, education, inventions, and computer programs are the major products in America these days, and they are generally created by service firms, not manufacturing ones. For example, Eric Bulock used less than $1,000 to start Passport Express Services, a service business that helps people get their passports renewed within 24 hours rather than the usual six weeks. From his start in 1996, sales have grown to well over the $1 million mark. 29 In their book The Millionaire Next Door,

13 Small Business: Its Opportunities and Rewards CHAPTER 1 13 Stanley and Danko point out that most self-employed millionaires are in services or professions, not manufacturing Seventy percent (or 80 percent or 90 percent) of all new businesses fail within two years : Overall about two-thirds of businesses with employees survive four years or more. 31 That is better than the myth suggests, but it gets even better. For example, getting help helps. At the beginning of this chapter we report on the survival rates for people who get help. For example, 87 percent of incubator-based start-ups are still going after four years. 32 Small Business Development Center clients usually have only half the failure rate of start-ups in general. 33 College graduates who have taken classes in small business or entrepreneurship also have much better chances of starting and growing businesses than business school graduates without such training, and they have much higher rates of success than the general public. 34 Taking a course like this puts you into the group likely to make it not only for the first two years, but also well beyond. Now let s look at the specific kinds of things you need to know and do to successfully start your own business. Getting Started Now: Entry Competencies There are a million things you could do to start a business, but which ones are best? Sometimes the answer will come to you in the form of an opportunity or offer, and sometimes you ll need to take the first steps yourself. In order to start a business, you need four elements to come together boundary, resources, intention, and exchange. 35 This is referred to as the BRIE model, as shown in Figure 1.3. A business needs the benefits of a boundary something that sets it up as a firm, and sets it off from the buying or selling or bartering we all do occasionally. A boundary can be something as simple as a business name or government registration, a phone or address dedicated to the business, or a specific location for the firm in a home, commercial space, or even on the Internet. Having a boundary gives you a place to locate and protect the resources you ve gathered for the business. Resources include the product or service to be offered, informational resources on markets and running a business, financial resources, and human resources such as your own time to devote to the business, or that of others working with you or for you. Intention is the desire to start a business and is the most frequently occurring element of the BRIE model. Those 50 percent of Americans who think about starting their own business are expressing their intentions. Exchange is also needed. This refers to moving resources, goods, or service to others, in exchange for money or other resources. If the firm doesn t exchange with its environment, there is no business taking place. LO5 Identify actions key to becoming a small business owner. Boundary Creating a place for your business in location and in people s minds Your Small Business Resources The money, product, knowledge, etc., that make up the business FIGURE 1.3 Four Elements Needed to Get Your Business Started (BRIE) Intention The desire to start a business Exchange Moving resources/products/ services in exchange for money

14 14 PART 1 Entrepreneurs and Ideas: The Basis of Small Business SKILL MODULE 1.2 BRIE Self-Assessment The BRIE (boundary-resources-intention-exchange) model is a proven 36 and handy way to think about the activities necessary to get a business started. It also is a model that will come up again in later chapters of the book. At this point in the course, how many of the items have you done so far to get your business started the right way? The complete list of BRIE activities is given in the following table. Look at the BRIE list and check off actions you ve taken already. Next to each item are parentheses which tell you in which chapter that topic is covered, in case you want to skip ahead to see how we suggest you do it. This exercise can help you think through which chapters are most important to your preparing your business. The list can also be scored as a checklist. Go through the list and check off which items you have already done in starting a business. Then write in the first column how many of each BRIE category you ve done so far. Once you are done, you can see how to score the BRIE checklist at the end of the Skill Module. BRIE Checklist Done Boundary creating a place for your business in space and in people s minds Number of boundary actions done Opening a bank account for the business (Ch. 14) Registering the business name with the state (Ch.18) Creating business cards and/or stationery (Ch. 10) Purchasing a domain name (Ch.11) Creating a business Web site (Ch. 11) Obtaining a business telephone line Identifying a place for the business at home or elsewhere (Ch. 11) Resources the things that make up the business, like money, products, knowledge, etc. Number of resource actions done Organizing a start-up team (Ch. 19) Obtaining copyright, patents, trademarks (Ch. 18) Purchasing raw materials, inventory, supplies (Ch. 16) Acquiring major items (equipment, facilities, property) (Ch. 16) Hiring employees and managers (who do not share ownership) (Ch. 19) Participating in classes or workshops on starting a business (If you are taking a small business course, you can check this item.) Participating in programs that help new businesses get established like SIFE, CEO or SBIDA (on Web site) Intention demonstrating a determination to get the business going and for it to be successful Number of intention actions taken Thinking about the business (Ch. 4, 5 & 6) Undertaking marketing and promotional efforts (Ch. 7 & 10) Developing your product or service (Ch. 4 & 9) Beginning your full-time commitment to the business (> 35 hrs/wk) Preparing a business plan (Ch. 8) Defining market opportunities (Ch. 4 & 12) Developing projected financial statements (Ch. 7, 13 & 14)

15 Small Business: Its Opportunities and Rewards CHAPTER 1 15 Exchange making investments in and sales from the business Number of exchange actions done Generating sales revenue (Ch. 10) Arranging child care to work on business Establishing credit with a supplier (Ch. 15) Saving money to invest in the business (Ch. 13 & 15) Investing money in the business (Ch. 15) Seeking funds from financial institutions or others (Ch. 15) Seeking funds from spouse or household partner (Ch. 15) Seeking funds from current employer (Ch. 15) The scoring is straightforward. At a minimum you need to have taken at least one action in each of the BRIE categories 37 to successfully start and grow a business. Business survival rates increase with the number of items checked across the different categories. 38 So people who can check three or four items in each BRIE category are more likely to have surviving and growing firms than those who check only one item per category. Having a BRIE category with nothing checked indicates that it is likely that something major is being overlooked, so the business is likely to fail. It is also important to balance BRIE activities. For example, having lots of boundary activities done and only a few exchange ones is likely to lead to an unbalanced approach to business and a lesser chance of survival. The BRIE model factors outline the activities that need to take place to get a firm going. Skill Module 1.2 is a self-assessment that can help you recognize what important steps you have taken to start your business, and what remains to be done. The BRIE model can help you deal with one of the biggest hurdles to starting a business. According to the experts, the biggest problem is simply inaction as mentioned earlier. Stanford management professors Gerry Salancik and Bob Sutton 39 say that even when people know taking action would be in their own best interests, most people tend to procrastinate, sticking with inaction or doing familiar things that have not worked. Salancik and Sutton recommend taking small steps toward a goal as an easy way to start. The BRIE checklist gives you the kind of small steps that can make all the difference. Consider coming back to this checklist periodically to help assess your preparations for business and determine what you still need to do. Taking lots of small steps is a sure way to achieve your goals. Small Business and the Economy We ve talked about why small business is important for the individuals for whom income, growth, and flexibility were among the most important rewards of ownership. But you also need to know that small business is vitally important to your community and even to our economy. Part of this comes from the new things small businesses contribute to the economy, particularly new jobs and innovations, as well as the basics that small businesses provide for all of us jobs, taxes, and products or services. LO6 Understand how small businesses are important to our economy and your community. New Jobs Since the 1970s big business has cut tens of millions of jobs. In the meantime, small business has added tens of millions of jobs. In the latest statistics, small businesses created 75 percent of the 3.4 million new jobs created. 40 When the Census Bureau looked more closely at the figures, it concluded that small business start-ups in the first two years of operation accounted for virtually all the net new jobs in America. 41 Small business is the engine of job generation, but it is important for existing jobs, too.

16 16 PART 1 Entrepreneurs and Ideas: The Basis of Small Business occupational structure The sequence or organization of jobs and careers in the economy. creative destruction The way that newly created goods, services, or firms can hurt existing goods, services, or firms. Small businesses employ more than half of all Americans, providing wages, salaries, and the taxes those working people pay the government. 42 Aiming for self-employed occupations like dentistry, building inspection, plumbing, or farming means also choosing to go into small business. It s that way because those occupations are structured that way. 43 The same is true when you decide to go into the family business the occupational structure results in your becoming a small business owner. 44 Small businesses are also a key employer because they are more willing than most large businesses to offer jobs to people with atypical work histories or needs, like people new to the workforce, people with uneven employment histories, and people looking for part-time work. These employment issues are at the core of what makes small business attractive to local and state governments. Innovations Small business is a key element of every nation s economy because it offers a very special environment in which the new can come into being. Austrian economist Joseph Schumpeter labeled this process creative destruction. 45 It refers to the way that newly created goods, services, or firms can hurt existing goods, services, or firms. For example, when a new restaurant opens in your neighborhood, people flock to it to find out what it s like. This helps the new restaurant, but it also causes the other restaurants in the area to lose business, at least temporarily. One of the most famous examples of creative destruction is the personal computer, which started as a hobby that big business spurned. In the 1970s there were microcomputers. Radio Shack had thousands of TRS-80s in schools. Another type of computer called an S-100 was used in tech-savvy small businesses. However, there were no computers designed with families in mind. Members of the Silicon Valley s Homebrew Computer Club made these personal computers from scratch in their basements and garages, and showed them off to one another. One member of the club was Steve Wozniak, who worked part time at a Hewlett Packard (HP) lab. Using parts he scrounged from the lab, he built a personal computer on a wooden board. It combined graphics with text (a revolution at the time). Homebrew members went wild over it and assured Steve that it would be a commercial hit. Ever a loyal HP employee, Wozniak offered the machine to his bosses at HP. After all, he built it with HP parts, in his spare time at HP. They rejected the idea, saying that personal computers would never be a success, but they gave Wozniak permission to go ahead on his own. Wozniak showed it to his best friend, Steve Jobs, who called it the Apple computer to make it seem friendly and popular, and together they formed Apple Computer. 46 Apple made the personal computer popular and paved the way for IBM PCs and the personal computer explosion. That explosion redrew the lines of the entire computer industry, but it also created tremendous new wealth, utility, and innovation. Big business often has trouble with innovations that would eat away at existing business, but small businesses are more likely to see new revenues in innovations. Why do so many innovations come from small business? Remember that most people going into small business mention flexibility as a key reward, such as the flexibility to do the work they think is important. Small business owners are more free of the judgments and social constraints of workers elsewhere. 47 To give you an idea how much more powerful innovation is in small business, the U.S. Small Business Administration reports that among firms that hold one or more patents, small businesses generate 13 to 14 times the number of patents per employee than do big businesses. And the patents produced in those small businesses are twice as likely to be among the top 1 percent of all patents cited by others. 48 That citation is a measure of the importance of the invention. The Small Business Administration compiled a list of major inventions that came from small businesses (see Table 1.2 ). In the end, the freedom small business gives owners to pursue and perfect their dream creates the innovations from which we all benefit not just major inventions like the personal computer, but whole classes of products such as snowboards (21-year-old

17 Small Business: Its Opportunities and Rewards CHAPTER 1 17 TABLE 1.2 The SBA s List of Major Inventions from Small Businesses 49 Air-conditioning Heart valve Prefabricated housing Air passenger service Heat sensor Pressure-sensitive tape Airplane Helicopter Prestressed concrete Articulated tractor chassis High-resolution CAT scanner Programmable computer Assembly line High-resolution digital X-ray Quick-frozen food Audio tape recorder High-resolution X-ray microscope Reading machine Bakelite Human growth hormone Rotary oil drilling bit Biomagnetic imaging Hydraulic brake Safety razor Biosynthetic insulin Integrated circuit Scanner cotton picker Catalytic petroleum cracking Kidney stone laser Six-axis robot arm Cellophane artificial skin Large computer Soft contact lens Computerized blood pressure Link trainer Solid fuel rocket engine Controller Microprocessor Stereoscopic map Continuous casting Nuclear magnetic resonance scanner Strain gauge Defibrillator Optical scanner Strobe lights DNA fingerprinting Oral contraceptives Supercomputer Double-knit fabric Outboard engine Two-armed mobile robot Electronic spreadsheet Overnight national delivery Vacuum tube Freewing aircraft Pacemaker Variable output transformer FM radio Personal computer Vascular lesion laser Front-end loader Photo typesetting Xerography Geodesic dome Polaroid camera X-ray telescope Gyrocompass Portable computer Zipper Dimitrije Milovich in ), earmuffs (15-year-old Chester Greenwood in ), computer-controlled telephone systems (Krisztina Holly in ), date rape drug testing coasters (Brian Glover, 35, and Francisco Guerra, 34, in ), and Kitty Litter (Ed Lowe, 27 in ) that were developed by innovative small business owners. New Opportunities People who own their own business are presented with tremendous opportunities not only to improve their life and wealth, but also to help them move into and upward in the economy and society of the United States. The opportunities small business offers for getting into the economic mainstream of American life makes it attractive to people who foresee problems fitting into existing businesses not only people with innovative ideas, but immigrants; people facing unusual schedules, demands, or limitations on their lives; and even people who need a second chance. 55 For many such people, small business is the best business opportunity. Small businesses offer communities another type of opportunity the opportunity to enjoy goods and services. Imagine a neighborhood or town without a grocery store or a pharmacy. In important ways, the town would not seem like a real community. A small grocery, drugstore, hardware store, or gas station might be able to use its low overhead and capacity to adapt to local needs (e.g., a grocery store stocking a lot of fishing supplies to appeal to visiting fishing enthusiasts) to make a profit where larger chain stores could