Chapter2:THE ENTREPRENEURIAL PROCESS
An entrepreneur is someone who perceives an opportunity and
creates an organization to pursue it. The entrepreneurial process includes all
the functions, activities, and actions that are part of perceiving opportunities
and creating organizations to pursue them. But is the birth of a new enterprise
just happenstance and its subsequent success or failure a chance process? Or
can the art and science of entrepreneurship be taught? Clearly, professors and
their students believe that it can be taught and learned because
entrepreneurship is one of the fastest growing new fields of study in American
higher education. A study by the Kauffman Foundation found that 61% of U.S.
colleges and universities have at least one course in entrepreneurship.1 It is
possible to study entrepreneurship in certificate, associate’s, bachelor’s,
master’s, and PhD programs.
That transformation in higher education—itself a wonderful
example of entrepreneurial change—has come about because a whole body of
knowledge about entrepreneurship has developed during the past two decades or
so. The process of creating a new business is well understood. Yes,
entrepreneurship can be taught. No one is guaranteed to become a Bill Gates or
a Donna Karan, any more than a physics professor can guarantee to produce an
Albert Einstein or a tennis coach can guarantee a Serena Williams. But students
with the aptitude to start a business can become better entrepreneurs.
Critical Factors for Starting a New Enterprise
We will begin by examining the entrepreneurial process (see
Figure 2.1). These are the factors—personal, sociological, organizational, and
environmental—that give birth to a new enterprise and influence how it develops
from an idea to a viable enterprise. A person gets an idea for a new business
through either a deliberate search or a chance encounter. Whether he or she
decides to pursue that idea depends on factors such as alternative career
prospects, family, friends, role models, the state of the economy, and the
availability of resources.
Origins of Home Depot
Bernie Marcus was president of the now-defunct Handy Dan
home improvement chain, based in California, when he and Arthur Blank were
abruptly fired by new management. That day and the months that followed were
the most pivotal period in his career, he says. “I
was 49 years old at the time and I was pretty devastated by
being fired. Still, I think it’s a question of believing in yourself. Soon
after, we [Blank and Marcus] started to realize that this was our opportunity
to start over,” says Marcus.
Marcus and Blank then happened upon a 120,000- square-foot
store called Homeco, operating in Long Beach, California. The two instantly
realized that the concept—an oversized store packed with merchan- dise tagged
with low prices—had a magical quality. They wanted to buy the business, but it
was essentially bankrupt. Marcus and Blank talked Homeco owner Pat
Farah into joining them in Atlanta, and the trio, along with
Ron Brill, began sketching the blueprint for Home Depot.3
There is almost always a triggering event that gives birth
to a new organization. Perhaps the entrepreneur has no better career prospects.
For example, Melanie Stevens was a high school dropout who, after working a
number of minor jobs, had run out of career options. She decided that making
canvas bags in her own tiny business was better than earning low wages working
for someone else. Within a few years, she had built a chain of retail stores
throughout Canada.
Sometimes the person has been passed over for a promotion or
even laid off or fired. Howard Rose had been laid off four times as a result of
mergers and consolidations in the pharmaceutical industry, and he had had
enough of it. So he started his own drug packaging business, Waverly
Pharmaceutical. Tim Waterstone founded Waterstone’s bookstores after he was
fired by W. H. Smith. Ann Gloag quit her nursing job and used her bus-driver
father’s $40,000 severance pay to set up Stagecoach bus company with her
brother, exploiting legislation deregulating the United Kingdom’s bus industry.
Jordan Rubin was debilitated by Crohn’s disease when he invented a diet
supplement that restored his health; he founded a company, Garden of Life, to
sell that diet. Noreen Kenny was working for a semiconductor company and could
not find a supplier to do precision mechanical work, so she launched her own
company, Evolve Manufacturing Technologies, to fill that void. The Baby
Einstein Company was started by Julie Aigner-Clark when she discovered that there
were no age- appropriate products available to help her share her love of art,
classical music, language, and poetry with her newborn daughter. Jim Poss,
while walking down a Boston street, observed a concept—an oversized store
packed with merchan- dise tagged with low prices—had a magical quality. They
wanted to buy the business, but it was essentially bankrupt. Marcus and Blank
talked Homeco owner Pat
Farah into joining them in Atlanta, and the trio, along with
Ron Brill, began sketching the blueprint for Home Depot.3
There is almost always a triggering event that gives birth
to a new organization. Perhaps the entrepreneur has no better career prospects.
For example, Melanie Stevens was a high school dropout who, after working a
number of minor jobs, had run out of career options. She decided that making
canvas bags in her own tiny business was better than earning low wages working
for someone else. Within a few years, she had built a chain of retail stores
throughout Canada.
Sometimes the person has been passed over for a promotion or
even laid off or fired. Howard Rose had been laid off four times as a result of
mergers and consolidations in the pharmaceutical industry, and he had had
enough of it. So he started his own drug packaging business, Waverly Pharmaceutical.
Tim Waterstone founded Waterstone’s bookstores after he was fired by W. H.
Smith. Ann Gloag quit her nursing job and used her bus-driver father’s $40,000
severance pay to set up Stagecoach bus company with her brother, exploiting
legislation deregulating the United Kingdom’s bus industry. Jordan Rubin was
debilitated by Crohn’s disease when he invented a diet supplement that restored
his health; he founded a company, Garden of Life, to sell that diet. Noreen
Kenny was working for a semiconductor company and could not find a supplier to
do precision mechanical work, so she launched her own company, Evolve
Manufacturing Technologies, to fill that void. The Baby Einstein Company was
started by Julie Aigner-Clark when she discovered that there were no age-
appropriate products available to help her share her love of art, classical
music, language, and poetry with her newborn daughter. Jim Poss, while walking
down a Boston street, observed a Andreessen to found Netscape Communications.
Within 12 months, its browser software, Navigator, dominated the Internet’s
World Wide Web (WWW or Web). When Netscape went public in August 1995, Clark
became the first Internet billionaire. Then in June 1996, Clark launched
another company, Healtheon (subsequently merged with WebMD), to enable doctors,
insurers, and patients to exchange data and do business over the Internet with
software incorporating Netscape’s Navigator.
Much rarer is the serial entrepreneur such as Wayne
Huizenga, who ventures into unrelated industries: first in garbage disposal
with Waste Management, next in entertainment with Blockbuster Video, then in
automobile sales with AutoNation. Along the way, he was the original owner of
the Florida Marlins baseball team, which won the World Series in 1997.
What factors influence someone to embark on an
entrepreneurial career? Like most human behavior, entrepreneurial traits are
shaped by personal attributes and environment.
Personal Attributes
In the entrepreneurial 1980s, there was a spate of magazine
and newspaper articles that were entitled “Do you have the right stuff to be an
entrepreneur?” or words to that effect. The articles described the most
important characteristics of entrepreneurs and, more often than not, included a
self-evaluation exercise to enable readers to determine if they had the right
stuff. Those articles were based on flimsy behavioral research into the
differences between entrepreneurs and nonentrepreneurs. The basis for those
exercises was the belief, first developed by David McClelland in his book The
Achieving Society, that entrepreneurs had a higher need for achievement than
nonentrepreneurs and that they were moderate risk takers. One engineer almost
abandoned his entrepreneurial ambitions after completing one of those exercises.
He asked his professor at the start of an MBA entrepreneurship course if he
should take the class because he had scored very low on an entrepreneurship
test in a magazine. He took the course, however, and wrote an award-winning
plan for a business that was a success from the very beginning.
There is no neat set of behavioral attributes that allows us
to separate entrepreneurs from nonentrepreneurs. A person who rises to the top
of any occupation, whether an entrepreneur or an administrator, is an achiever.
Granted, any would-be entrepreneur must have a need to achieve, but so must
anyone else with ambitions to be successful.
It does appear that entrepreneurs have a higher internal
locus of control than nonen- trepreneurs, which means that they have a stronger
desire to be in control of their own fate.4 This has been confirmed by many
surveys in which entrepreneurs said independence was a very important reason for starting their
businesses. The main reasons they gave were inde- pendence, financial success, self-realization,
recognition, innovation, and roles (to continue a family tradition, to follow
the example of an admired person, to be respected by friends). Men rated
financial success and innovation higher than women did. Interestingly, the
reasons that nascent entrepreneurs gave for starting a business were similar to
the reasons given by nonentrepreneurs for choosing jobs.5
The most important characteristics of successful
entrepreneurs are shown in Figure 2.2.
Environmental Factors
Perhaps as important as personal attributes are the external
influences on a would-be entrepreneur. It’s no accident that some parts of the
world are more entrepreneurial than others. The most famous region of high-tech
entrepreneurship is Silicon Valley. Because everyone in Silicon Valley knows
someone who has made it big as an entrepreneur, role models abound. This
situation produces what Stanford University sociologist Everett Rogers called
“Silicon Valley fever.”6 It seems as if everyone in the valley catches that bug
sooner or later and wants to start a business. To facilitate the process, there
are venture capitalists who understand how to select and nurture high-tech
entrepreneurs, bankers who specialize in lending to them, lawyers who
understand the importance of intellectual property and how to protect it,
landlords who are experienced in renting real estate to fledgling companies,
suppliers who are willing to sell goods on credit to companies with no credit
history, and even politicians who are supportive.
Knowing successful entrepreneurs at work or in your personal
life makes becoming one yourself seem much more achievable. Indeed, if a close
relative is an entrepreneur, you are more likely to want to become an
entrepreneur yourself, especially if that relative is your mother or father. At
Babson College, more than half of the undergraduates studying entrepreneurship
come from families that own businesses, and half of the Inc. 500 entrepreneurs
in 2012 had a parent who was an entrepreneur.7 But you don’t have to be from a
business-owning family to become an entrepreneur. Bill Gates, for example, was
following the family tradition of becoming a lawyer when he dropped out of
Harvard and founded Microsoft. He was in the fledgling microcomputer industry,
which was being built by entrepreneurs, so he had plenty of role models among
his friends and acquaintances. The United States has an abundance of high-tech
entrepreneurs who are household names. One of them, Meg Whitman (eBay and
Hewlett-Packard), is so well known that she was the gubernatorial candidate
preferred by 41% of California voters in 2012 . Some universities are hotbeds
of entrepreneurship. For example, Massachusetts Institute of Technology (MIT)
has produced numerous entrepreneurs among its faculty and alums. Companies with
an MIT connection transformed the Massachusetts economy from one based on
decaying shoe and textile industries into one based on high technology.
The Entrepreneur and the Management Team
Regardless of how right the opportunity may seem to be, it
will not become a successful business unless it is developed by a person with
strong entrepreneurial and management skills. What are the important skills?
First and foremost, entrepreneurs should have experience in
the same industry or a similar one. Starting a business is a very demanding
undertaking indeed. It is no time for on-the-job training. If would-be
entrepreneurs do not have the right experience, they should either get it
before starting their new venture or find partners who have it.
Some investors say the ideal entrepreneur is one who has a
track record as a successful entrepreneur in the same industry and who can
attract a seasoned team. Half the CEOs of the Inc. 500 high-growth small
companies had started at least one other business before they founded their
present firms. When Joey Crugnale acquired his first ice cream shop in 1977, he
already had almost 10 years in the food service industry. By 1991, when
Bertucci’s brick-oven pizzeria went public, he and his management team had a
total of more than 100 years’ experience in the food industry. They had built
Bertucci’s into a rapidly growing chain with sales of $30 million and net
income of $2 million.
Without relevant experience, the odds are stacked against
the neophyte in any industry. An electronics engineer thought he had a great
idea for a chain of fast-food stores. When asked if he had ever worked in a
fast-food restaurant, he replied, “Work in one? I wouldn’t even eat in one. I
can’t stand fast food!” Clearly, he would have been as miscast as a fast-food
entrepreneur as Crugnale would have been as an electronics engineer.
True, there are entrepreneurs who have succeeded
spectacularly with no prior industry experience. Jeff Bezos of Amazon.com,
Anita Roddick of The Body Shop, Ely Callaway of Callaway Golf, and Richard
Branson of Virgin Airlines are four notable examples. But they are the
exceptions.
Second to industry know-how is management experience,
preferably with responsibility or budgets or, better yet, accountability for
profit and loss. It is even better if a would-be entrepreneur has a record of
increasing sales and profits. Of course, we are talking about the ideal
entrepreneur. Very few people measure up to the ideal. That does not mean they
should not start a new venture. But it does mean they should be realistic about
the size of the business they should start. Eighteen years ago, two 19-year-old
students wanted to start a travel agency business in Boston. When asked what
they knew about the industry, one replied, “I live in California. I love to
travel.” The other was silent. Neither of them had worked in the travel
industry, nor had anyone in either of their families. They were advised to get
experience. One joined a training program for airline ticket agents; the other took
a course for travel agents. They became friends with the owner of a local
Uniglobe travel agency who helped them with advice. Six months after they first
had the idea, they opened a part-time campus travel agency. In the first six
months, they had about $100,000 of revenue and made $6,000 of profit but were
unable to pay themselves any salary. In that way, they acquired experience at
no expense and at low risk. Upon graduation, one of them, Mario Ricciardelli,
made it his full-time job and continued building the business and gaining
experience at the same time. In 2012, after many bumps in the road, the
business—now named Studentcity.com—is one of the largest student travel
businesses in the world.
Startup Capital
You’ve developed your idea, you’ve carefully assessed what
resources you will need to open your business and make it grow, you’ve pulled
all your strategies together into a business plan, and now you know how much
startup capital you need to get you to the point where your business will
generate a positive cash flow. How are you going to raise that startup capital?
There are two types of startup capital: debt and equity.
Simply put, with debt, you don’t have to give up any ownership of the business,
but you have to pay current interest and eventually repay the principal you
borrow; with equity, you have to give up some of the ownership to get it, but
you may never have to repay it or even pay a dividend. So you must choose
between paying interest and giving up some of the ownership.
In practice, your choice usually depends on how much of each
type of capital you can raise. Most startup entrepreneurs do not have much
flexibility in their choice of financing. If it is a very risky business
without any assets, it will be impossible to get any bank debt without putting
up some collateral other than the business’s assets—and most likely that
collateral will be personal assets. Even if entrepreneurs are willing to
guarantee the whole loan with their personal assets, the bank will expect
entrepreneurs to put some equity into the business, probably equal to 25% of
the amount of the loan. If your personal assets are less than the amount of the
loan, the bank might recommend an SBA-guaranteed loan, in which case you would
have to put in more equity.
The vast majority of entrepreneurs start their businesses by
leveraging their own savings and labor. Consider how Apple, one of the most
spectacular startups of all time, was funded. Steve Jobs and Stephen Wozniak
had been friends since their school days in Silicon Valley. Wozniak was an
authentic computer nerd. He had tinkered with computers from childhood, and he
built a computer that won first prize in a science fair. His SAT math score was
a perfect 800, but after stints at the University of Colorado, De Anza College,
and Berkeley, he dropped out of school and went to work for Hewlett-Packard.
His partner, Jobs, had an even briefer encounter with higher education: After
one semester at Reed College, he left to look for a swami in India. When he and
Wozniak began working on their microcomputer, Jobs was employed at Atari, the
leading video game company.
Apple soon outgrew its manufacturing facility in the garage
of Jobs’ parents’ house. Their company, financed initially with $1,300 raised
by selling Jobs’ Volkswagen and Wozniak’s calculator, needed capital for
expansion. They looked to their employers for help. Wozniak proposed to his
supervisor that Hewlett-Packard produce what later became the Apple II. Perhaps
not surprisingly, Hewlett-Packard declined. After all, Wozniak had no formal
qualification in computer design; indeed, he did not even have a college
degree. At Atari, Jobs tried to convince founder Nolan Bushnell to manufacture
Apples. He too was rejected.
However, on the suggestion of Bushnell and McKenna, a
Silicon Valley marketing ace, the two partners contacted Don Valentine, a
venture capitalist, in the fall of 1976. In those days, Jobs’ appearance was a
holdover from his swami days; he definitely did not project the image of
Doriot’s grade-A man, even by Silicon Valley’s casual standards. Valentine did
not invest. But he did put them in touch with Armas Markkula, Jr., who had
recently retired from Intel a wealthy man. Markkula saw the potential in Apple,
and he knew how to raise money. He personally invested $91,000, secured a line
of credit from Bank of America, put together a business plan, and raised
$600,000 of venture capital.
