Tài liệu The.portable.mba.in.entrepreneurship

The Portable MBA in ENTREPRENEURSHIP i The Portable MBA in ENTREPRENEURSHIP F O U R T H E D I T I O N Edited by W il li am D . Bygra v e, DBA a n d Andrew Zacharakis, PhD John Wiley & Sons, Inc. iii ∞ This book is printed on acid-free paper.  C 2010 by William D. Bygrave and Andrew Zacharakis. All rights reserved. Copyright  Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www. copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. ISBN 978-0-470-48131-8 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 iv Contents Complete List of Downloadable Materials for The Portable MBA in Entrepreneurship vii Preface to the Fourth Edition ix About the Contributors xi 1 The Entrepreneurial Process William D. Bygrave 1 2 Idea Generation Heidi M. Neck 27 3 Opportunity Recognition, Shaping, and Reshaping Andrew Zacharakis 53 4 Entrepreneurial Marketing Abdul Ali and Kathleen Seiders 83 5 Business Planning Andrew Zacharakis 109 6 Building Your Pro Forma Financial Statements Andrew Zacharakis 137 7 Equity Financing: Informal Investment, Venture Capital, and Harvesting William D. Bygrave 8 Debt and Other Forms of Financing Joel M. Shulman 9 External Assistance for Start-ups and Small Businesses Elizabeth J. Gatewood and Carol McLaurin 161 197 225 10 Legal and Tax Issues Richard Mandel 263 11 Intellectual Property Kirk Teska and Joseph S. Iandiorio 297 v vi Contents 12 Selling in an Entrepreneurial Context Mark P. Rice and H. David Hennessey 13 Beyond Start-up: Developing and Sustaining the Growing Organization Donna Kelley and Edward Marram 329 355 14 Franchising Steve Spinelli 385 15 Social Entrepreneurship Heidi M. Neck 411 Glossary 437 Index 459 Complete List of Downloadable Materials for The Portable MBA in Entrepreneurship Online Only: Chapter 2 Web Site Material: Ideaspace Exercise Chapter 4 Web Site Material: Customer Interview Chapter 6 Web Site Material: Pro Forma Financial Statements Chapter 7 Web Site Material: BFSW Cap Table Chapter 9 Web Site Material: Where to Find SBDC’s Online and in Manuscript: Downloadable Exhibit 2.4: Nine-Dot Exercise Downloadable Exhibit 3.7: Value Chain Exercise Downloadable Exhibit 3.9: Competitive Profile Matrix Downloadable Exhibit 3.11: Opportunity Checklist Downloadable Exhibit 4.5: Product Diffusion Curve Downloadable Exhibit 4.6: Pricing Decision for an Entrepreneur Downloadable Exhibit 5.8: Competitive Map Downloadable Exhibit 5.11: Operations Flow Downloadable Exhibit 5.13: Launch Timeline Downloadable Exhibit 6.2: Financial Construction Checklist Downloadable Exhibit 6.5: Operating Expenses Worksheet Downloadable Exhibit 10.4: Comparison of Equity Sharing Methods Downloadable Exhibit 11.1: Patent Management Spreadsheet Downloadable Exhibit 14.3: License Agreement Key Provision Impact Analysis Downloadable Exhibit 14.6: Checklist for International Franchising Downloadable Exhibit 15.7: Wicked versus Tame Problems vii Preface to the Fourth Edition As we write the fourth edition, the United States and world have gone through economic upheaval. Unemployment, foreclosures, government bailouts to the financial and auto sectors have created volatility and uncertainty. Yet, while the period has been bleak, we expect the future to be bright. The one truth for the United States—and for more and more nations as entrepreneurship has taken hold globally—is that world-changing new ventures often are born at the depth of economic upheavals. During the Great Depression, Boeing emerged and changed the nature of aerospace; IBM was founded during the Long Depression (1872–1896); and many great companies opened shop during recessions, including Hyatt and Burger King during the 1957–1958 recession, FedEx during the 1973 oil embargo, and CNN and MTV during the 1980–1981 recession. Thus, entrepreneurship is even more important to economic recovery and ongoing health for countries worldwide. We hope that this book will inspire the next generation of great entrepreneurs and companies. Today, U.S. small businesses—firms with 500 or fewer employees—employ slightly more than 50 percent of the labor force and generate approximately half of the nonfarm private gross domestic product (GDP). If the small business sector of the U.S. economy were a nation, its GDP would rank third in the world behind the non-small-business sector of the United States and the entire economy of Japan, and far ahead of the entire economies of China, Germany, the United Kingdom, France, and Italy. Not only are small businesses the engine for job creation, they are also a powerful force for innovation. They employ 39 percent of all high-tech workers and produce approximately 14 times more patents per employee than large firms. Since the publication of the third edition, a multitude of new, world-changing companies have been started. Facebook, Skype, and Twitter, among others, are changing the way we communicate and interact with each other. And large existing companies that are entrepreneurial continue to create and rejuvenate their businesses. No example is better than Apple, which since 2003 has launched the iPhone and iTouch. Close to 50 million units have been sold in its first 18 months. No doubt about it, entrepreneurship is what America does best, bar none. No other advanced industrial nation comes close. U.S. entrepreneurial companies created the personal computer, biotechnology, fast food, and overnight package delivery industries; transformed the retailing industry; overthrew AT&T’s telecommunications monopoly; revitalized the steel industry; invented the integrated circuit and the microprocessor; founded the nation’s most profitable airline; and the list goes on. ix x Preface to the Fourth Edition Is it any wonder that more and more people are choosing to be entrepreneurs? Entrepreneurship courses and programs have proliferated in the past 10 years. It is estimated that more than 2,000 U.S. colleges and universities, or about two-thirds of the total, have at least one course in entrepreneurship. It is possible to study entrepreneurship in certificate, associates, bachelors, masters, and PhD programs. Every business student, regardless of their career plans, needs to understand the role of entrepreneurship in the economy. Today, a business education without an entrepreneurship component is as incomplete as medical training without obstetrics. The Portable MBA in Entrepreneurship is a book for would-be entrepreneurs, people who have started small firms and who want to improve their entrepreneurial skills, and others who are interested in entrepreneurship, such as bank loan officers, lawyers, accountants, investors, and consultants—indeed, anyone who wants to get involved in the birth and growth of an enterprise. The chapters are written by leading authorities on new business creation, including professors, entrepreneurs, and consultants with extensive experience in teaching the art and science of starting and growing a venture. These authors practice what they teach. They have started businesses, served on boards of venture capital funds, been on boards of directors and boards of advisers of entrepreneurial companies, raised start-up and expansion capital, filed patents, registered companies, and, perhaps most important of all, have created new products and many new jobs. What’s more, they are tireless champions of entrepreneurship. They believe that entrepreneurs are crucial to America’s economic well-being. We would like to thank all the chapter authors for their contributions, as well as our research assistants, Mark Itskovitz, R. Gabriel Shih, and Henry McGovern. We hope you enjoy this book. WILLIAM D. BYGRAVE ANDREW ZACHARAKIS Arthur M. Blank Center for Entrepreneurship Babson College May 2009 About the Contributors Abdul Ali is the President’s Term Chair and an associate professor of marketing at Babson College. Earlier he taught at the University of Maryland in College Park and at Syracuse University. He served as Chair of the Marketing Division for six years (2000 to 2006) at Babson College. Dr. Ali’s teaching and research interests include new product management, entrepreneurial marketing, marketing research methods, marketing strategy, and marketing high-tech products. His work has appeared in Management Science, the Journal of Product Innovation Management, Managerial and Decision Economics, the Journal of Business Research, and Marketing Letters. He and two co-authors produced A Casebook for Business Statistics: Laboratories for Decision Making, published by John Wiley & Sons. He also co-authored a chapter each on entrepreneurial marketing in two books edited by William Bygrave and Andrew Zacharakis. William D. Bygrave, D.Phil., MBA, is a professor emeritus at Babson College. Dr. Bygrave joined the Center for Entrepreneurial Studies at Babson College in 1985 and directed it from 1993 to 1999. He was also the director of the annual Babson College– Kauffman Foundation Entrepreneurship Research Conference in 1994–1995 and 2001– 2003. He teaches and researches entrepreneurship, specifically financing of start-up and growing ventures. In 1997, he and Michael Hay at the London Business School started the Global Entrepreneurship Monitor (GEM), which examines the entrepreneurial competitiveness of nations. He is a member of the board of trustees of Babson College. Dr. Bygrave has founded a venture-capital-backed high-tech company, managed a division of a New York Stock Exchange–listed high-tech company, co-founded a pharmaceutical database company, and been a member of the investment committee of a venture capital firm. He was the 1997 winner of the Ernst & Young Entrepreneur of the Year award in the supporter category for New England. He has written more than 100 papers on topics that include venture capital, entrepreneurship, nuclear physics, hospital pharmaceuticals, and philosophy of science. He is also co-editor of Entrepreneurship (2007); The Venture Capital Handbook (1999); The Portable MBA in Entrepreneurship (third edition, 2003); The Portable MBA in Entrepreneurship Case Studies (second edition, 1997); Realizing Enterprise Value (1993); and Frontiers of Entrepreneurship Research; he was also an editor of Entrepreneurship Theory and Practice. He has served on the review boards of three entrepreneurship journals. Translations of his books have been published in Chinese, Japanese, Spanish, and Bahasa Indonesia. Areas of expertise include entrepreneurship, new venture creation, informal investment, and venture capital. xi xii About the Contributors Elizabeth J. (Betsy) Gatewood, PhD, has been the director of the University Office of Entrepreneurship & Liberal Arts at Wake Forest University since 2004. She served as the Jack M. Gill Chair of Entrepreneurship and director of the Johnson Center for Entrepreneurship & Innovation at Indiana University from 1998 to 2004. She was the executive director of the Gulf Coast Small Business Development Center Network, an organization providing training and consulting services to entrepreneurs and small business owners in the 32 counties of the greater Houston region, from 1989 to 1998. Dr. Gatewood founded the Center for Business and Economic Studies at the University of Georgia and served as its director from 1983 to 1989. She is a member of the Diana Project, a research study of women business owners and equity capital access, which won the FSF-NUTEK International Award for scientific work of outstanding quality and importance in the field of entrepreneurship. Dr. Gatewood serves on the board of directors of Delta Apparel, Inc. (AMEX:DLA) and on the Advisory Board for Spring Mill Ventures, a venture capital firm of the Village Ventures network. She is a past chair of the Entrepreneurship Division of the Academy of Management. She received the 1996 Advocate Award for outstanding contributions to the field of entrepreneurship from the Academy of Management. She holds a BS in psychology from Purdue University and an MBA with a concentration in finance and a PhD in business administration with a specialty in strategy from the University of Georgia. H. David Hennessey, PhD, is Professor of Marketing and International Business at Babson College. After gaining his undergraduate degree in economics and business administration at Norwich University, Northfield, Vermont, and an MBA from Clark University, Worcester, Massachusetts, Dr. Hennessey worked as a senior marketing analyst for the American Can Company. He then became marketing director for Interpace Corporation, based in New Jersey. He completed his PhD at New York University and joined Babson College in 1982. He has taught courses on global marketing, marketing strategy, sales management strategy, and foundations of management and entrepreneurship, and written numerous articles and case studies. He has co-authored Global Marketing Strategies (6th edition, 2004, with Jean-Pierre Jeannet); Global Marketing: An Interactive Approach (2nd edition, 2006, with Jean-Pierre Jeannet and Kate Gillespie); Global Account Management (2004, with Jean-Pierre Jeannet); and How to Write a Marketing Plan (3rd edition, 1996, with Robert J. Kopp). Dr. Hennessey has had executive and MBA teaching experience in programs at Babson College, Ashridge, IMD International, Rotterdam School of Management (RSM) Erasmus, and Helsinki School of Economics and Business Administration, as well as in Costa Rica, France, Holland, Germany, Switzerland, Finland, Hong Kong, and Japan. Participants are from many companies—for example, Electrolux, Unilever, IBM, Procter & Gamble, Investment Company Institute (ICI), Novartis, BBC, Cable and Wireless, BT Group, Compaq, Unisys, Philips, and Nokia. Professor Hennessey is the faculty director of the Evening MBA program at Babson College. He served as faculty director for the Irving Oil marketing program and the GTECH Corporation growth program. Joseph S. Iandiorio is a partner in the law firm of Iandiorio Teska & Coleman in Waltham, Massachusetts. The firm specializes in patents, trademarks, copyrights, trade secrets, licensing, litigation of intellectual property matters, employee and consultant About the Contributors xiii contracts, confidential disclosure agreements, and other related areas of intellectual property. Mr. Iandiorio has over 45 years of experience, including a period as an examiner in the U.S. Patent and Trademark Office. He is actively involved in fostering the creation and growth of small businesses and high-technology companies. He was chosen as the Small Business Administration’s Lawyer Small Business Advocate of the Year. He has been director and treasurer of the Massachusetts Technology Development Corporation, a venture capital fund; chairman and director of the Smaller Business Association of New England; a member of the Massachusetts Small Business Advisory Council and of the Science and Technology Advisory Board; and a member of the board of trustees of National Small Business United. Donna J. Kelley, PhD, is an associate professor of entrepreneurship at Babson College, and holds the David H. Park 1991 Term Chair in Entrepreneurship. Donna teaches courses in entrepreneurship, corporate entrepreneurship, and entrepreneurship in Asia. She has published research on innovation and entrepreneurial activities in technologybased start-ups and large established organizations in the United States and Asia. Her research has been published in the Journal of Business Venturing, Entrepreneurship: Theory & Practice, the Journal of Product Innovation Management, IEEE Transactions on Engineering Management, Human Resource Management, and others. Dr. Kelley received her PhD from Rensselaer Polytechnic Institute. Her early career involved work as a chemist in the graphics and industrial/consumer cleaning products industries. Her entrepreneurship experience involves founding a health fitness business and joining the management team of a computer hardware start-up, responsible for finance and operations. She was also a founding team member and a founding board member of a Chinese-immersion public charter school. She is a board member of the Global Entrepreneurship Research Association (GERA), the oversight organization for the Global Entrepreneurship Monitor (GEM), and she was a member of the GEM Korea research team. Richard P. Mandel, JD, is associate professor of law at Babson College, where he teaches a variety of courses in business law and taxation and serves as associate dean of the Undergraduate School. He has previously served as acting dean of the Undergraduate School at Babson and as chair of its Finance Division. Mr. Mandel is also of counsel to the law firm of Bowditch and Dewey, of Worcester, Boston, and Framingham, Massachusetts, where he specializes in the corporate, tax, and securities law issues of small businesses. Mr. Mandel has written a number of articles regarding the legal issues of small businesses and is a frequent contributor to the Portable MBA series. He holds an AB in political science and meteorology from Cornell University and a JD from Harvard Law School. Edward P. Marram, PhD, is senior lecturer at Babson College. His academic experience includes serving as director of the Entrepreneurial Center at Babson College, where he was instrumental in developing cooperative programs with the Entrepreneurial Department, the Executive Center, the Olin School of Engineering, and Intel, as well as others. He has taught entrepreneurship at Babson College, Harvard University, Olin School of Engineering, and Northeastern University, as well as at INSEAD in Fontainebleau, France, and at Flanders School of Business in Belgium; he has served as entrepreneur-in-residence at Babson College since 1990. In 1989 he was made a xiv About the Contributors Price-Babson College Fellow and in 1992 was awarded the Edwin M. Appel Prize “For Bringing Entrepreneurial Vitality to Academics in the True Spirit of the Price-Babson College Fellows Program.” Dr. Marram has taught business practices to faculty, graduate students, and entrepreneurs in the United States, in South America, and in both Eastern and Western Europe, and has lectured on entrepreneurial education to Polish faculty members and entrepreneurs at the University of Warsaw, worked with Slovenian entrepreneurs and educators, and developed executive training programs in Scotland and at INSEAD in France. Dr. Marram’s business/entrepreneurial experience includes being the founder, chief executive officer, and chairman of the board of Geo-Centers, Inc., a high-technology professional services firm, until its acquisition by SAIC, Inc. in October 2005. During his tenure as head of Geo-Centers, the company grew to over $200 million in revenue. Under Dr. Marram’s leadership, Geo-Centers established an in-house Research and Development Center to provide, for the global scientific community, a place for cuttingedge collaborations with the world’s finest scientists and engineers with a mission to transition research into applications and products. He holds BS and MS degrees from the University of Massachusetts and a PhD in physics from Tufts University. Heidi Neck, PhD, is the Jeffry A. Timmons Professor of Entrepreneurial Studies at Babson College. She is the faculty director of the Babson Symposium for Entrepreneurship Educators (SEE), where she works to improve the pedagogy of entrepreneurship education because venture creation is the economic growth engine of society. Her research interests include social entrepreneurship, entrepreneurship education, and creativity. She has contributed numerous book chapters, published research monographs, and refereed articles in such journals as the Journal of Small Business Management, Entrepreneurship Theory and Practice, and the International Journal of Entrepreneurship Education. She is on the editorial board of Entrepreneurship Theory and Practice and Academy of Management Learning & Education. Recognized for her contributions to innovative teaching and curriculum developments, she has received numerous awards, including Babson’s Deans’ Award for Excellence in Teaching and the Gloria Appel Prize for entrepreneurial vitality in academe. Dr. Neck completed her PhD in strategic management and entrepreneurship from the University of Colorado at Boulder in 2001. She holds a BS in marketing from Louisiana State University and an MBA from the University of Colorado, Boulder. Mark P. Rice, PhD, currently the Frederic C. Hamilton Professor for Free Enterprise at Babson College, served as the Murata Dean of the F. W. Olin Graduate School of Business at Babson College from 2001 to 2007. He also has an appointment as Professor of Technology Entrepreneurship at Babson’s sister school, the Olin College of Engineering. His research on corporate innovation and entrepreneurship has been published widely in academic and practitioner journals, including Sloan Management Review, Organization Science, R&D Management, the Journal of Marketing Theory and Practice, IEEE Engineering Management Review, Academy of Management Executive, and California Management Review. Dr. Rice consults and teaches in the areas of innovation management, sales/marketing development, technology strategy, new business incubation, and About the Contributors xv entrepreneurship. He is co-author of Radical Innovation: How Mature Companies Can Outsmart Upstarts, which was published by Harvard Business School. Professor Rice previously served as director of the nationally recognized RPI Incubator Program and as co-founder and director of the Severino Center for Technological Entrepreneurship at Rensselaer Polytechnic Institute. He has been a director and chairman of the National Business Incubation Association, which honored him in 1998 with its Founder’s Award. With Dr. Jana Matthews, he co-authored Growing New Ventures— Creating New Jobs: Principles and Practices of Successful Business Incubation. In 2002 Dr. Rice received the Edwin M. and Gloria W. Appel Entrepreneurship in Education Prize. He holds BS and MS degrees in mechanical engineering and a PhD in management from Rensselaer Polytechnic Institute. Joel M. Shulman, PhD, CFA, CMA, is an associate professor of entrepreneurship at Babson College. He has a PhD in finance along with Chartered Financial Analyst (CFA) and Certified Management Accountant (CMA) designations. He previously directed the Shulman CFA Review Program, which provided training for more than 12,000 investment professionals in over 100 countries throughout the world. He is the author or a co-author of numerous academic articles and books, including Getting Bigger by Growing Smaller, Encyclopedia of Business, Leasing for Profit, Alternatives to Conventional Financing, Planning Cash Flow, How to Effectively Manage Corporate Cash, A Manager’s Guide to Financial Analysis, The Job of Corporate Controller, and How to Manage and Evaluate Capital Expenditures. Dr. Shulman has consulted for small entrepreneurial firms and large corporations, including Coldwell Banker, Ford Motor Company, Freddie Mac, Kmart, Merrill Lynch, Salomon Brothers, Sears, and Unisys. He has also consulted for the World Bank, assisting with the development of capital markets in Central Asia and republics of the former Soviet Union. Kathleen Seiders, PhD, is an associate professor of marketing and Hillenbrand Distinguished Fellow at the Carroll School of Management, Boston College. Prior to her academic career, she had a 10-year career in food retailing. Her research has been published in journals that include the Journal of Marketing, Sloan Management Review, Academy of Management Executive, the Journal of Retailing, Annals of Internal Medicine, and the Journal of Public Policy & Marketing. She received best article awards for “Understanding Service Convenience” (JM) and “Obesity and the Role of Food Marketing” (JPP&M). Dr. Seiders is president of the Academic Council of the American Marketing Association. She has appeared on 60 Minutes and CBS Morning News, and has commented on many topics for NPR’s Marketplace, All Things Considered, and Morning Edition. Stephen Spinelli Jr., PhD, a leading authority on entrepreneurship, is president of Philadelphia University. He joined the university in September 2007 and launched a strategic planning process aimed at distinguishing the institution as the model for professional university education in the twenty-first century. Under his leadership, Philadelphia University’s commitment to active, collaborative, and real-world education grounded in the liberal arts has shaped its signature learning approach and formed the basis of its developing College of Design, Engineering and Commerce, where a unique curriculum xvi About the Contributors is being created around achieving innovation. A dedicated educator, Dr. Spinelli teaches a popular MBA course in entrepreneurship. Previously, Dr. Spinelli spent 14 years at Babson College, where he was vice provost for entrepreneurship and global management, chair of the Entrepreneurship Division, director of the Arthur M. Blank Center for Entrepreneurship, the Alan Lewis Chair in Global Management, and chair of the entrepreneurship task force. He has consulted for major corporations, and his work has appeared in numerous professional journals. He has been featured in the Chronicle of Higher Education, the Wall Street Journal, BusinessWeek, the Financial Times, and Entrepreneur. He has authored business cases and co-authored Business Plans That Work, Franchising: Pathway to Wealth Creation, How to Raise Capital, Never Bet the Farm, Entrepreneurship: The Engine of Growth, and New Venture Creation for the 21st Century. Dr. Spinelli co-founded Jiffy Lube International and was chairman/CEO of American Oil Change Corporation, pioneering the quick-lube industry. He holds a PhD in economics from Imperial College, University of London; an MBA from Babson College; and a BA in economics from McDaniel College. Kirk Teska is the managing partner of the Waltham, Massachusetts–based intellectual property law firm Iandiorio Teska & Coleman. The firm specializes in patents, trademarks, copyrights, trade secrets, licensing, litigation of intellectual property matters, employee and consultant contracts, confidential disclosure agreements, government contracts, and other related areas of intellectual property. Mr. Teska has 18 years of intellectual property law experience. He secures and litigates patents in nearly all areas of engineering, including optics, circuits, mechanical systems, processor-based systems, composites, computer software, the Internet, and business methods. Mr. Teska taught patent law at the Franklin Pierce Law Center and for nine years has taught classes as an adjunct professor at Suffolk University Law School. He is a regular columnist for Mass High Tech and Lawyers Weekly, where his columns “Patent Watch” and “IP Litigation Watch” appear monthly. Mr. Teska has written articles for and has been published in Trial magazine, the Computer Law Reporter, the Boston Business Journal, Mass High Tech, Bottom Line Business, Proceedings, the Journal of the Patent and Trademark Office Society, IEEE Spectrum, New England In-House, the ACC Docket, Mechanical Engineering magazine, Contract Management magazine, and The Freeman|Ideas on Liberty. He was also a director of the Smaller Business Association of New England (SBANE) and a past chairman of the IEEE Entrepreneurs’ Network. His book Patent Savvy was published in the fall of 2007 by Nolo Press. Andrew Zacharakis, PhD, is the John H. Muller Jr. Chair in Entrepreneurship and the director of the Babson College Entrepreneurship Research Conference, the leading academic conference on entrepreneurship worldwide. He previously served as chair of the entrepreneurship department and as acting director of the Arthur M. Blank Center for Entrepreneurship at Babson College. In addition, he served as president of the Academy of Management, Entrepreneurship Division, an organization with 1,800 members. His primary research areas include the venture capital process and entrepreneurial growth strategies. Dr. Zacharakis is the co-author of five books: The Portable MBA in Entrepreneurship, Business Plans That Work, How to Raise Capital, Entrepreneurship: About the Contributors xvii The Engine of Growth, and a textbook titled Entrepreneurship. He has been interviewed in newspapers nationwide, including the Boston Globe, the Wall Street Journal, and USA Today. He has also appeared on the Bloomberg Small Business Report and been interviewed on National Public Radio. Dr. Zacharakis has taught seminars at leading corporations, such as Boeing, MetLife, Lucent, and Intel. He has also taught executives in countries worldwide, including Spain, Chile, Costa Rica, Mexico, Australia, China, Turkey, and Germany. He received a BS (finance/marketing), University of Colorado; an MBA (finance/international business), Indiana University; and a PhD (strategy and entrepreneurship/cognitive psychology), University of Colorado. Professor Zacharakis actively consults with entrepreneurs and small business start-ups. His professional experience includes positions with the Cambridge Companies (investment banking/venture capital), IBM, and Leisure Technologies. The Portable MBA in Entrepreneurship, Fourth Edition Edited by William D. Bygrave and Andrew Zacharakis Copyright © 2010 William D. Bygrave and Andrew Zacharakis 1 The Entrepreneurial Process William D. Bygrave How This Chapter Fits into a Typical MBA Curriculum The entrepreneurial process is an introductory lecture at the start of a new venture course in MBA programs. It gives an overview of the importance of entrepreneurship in the economy. Then it sets the table for the semester by giving an outline of the content of the course, which comprises the entrepreneurial process from conception to birth of a new venture and its early growth. This chapter includes understanding entrepreneurial attributes and skills, finding and evaluating opportunities, and gathering resources to convert opportunities into businesses. Students learn how to weigh up entrepreneurs and their plans for new businesses. In this book, as in most MBA new ventures courses, the focus is on entrepreneurs and how they start new companies. Major areas of concentration include the following: searching the environment for new venture opportunities; matching an individual’s skill with a new venture; evaluating the viability of a new venture; and financing, starting up, and operating a new venture. Who Uses This Material in the Real World—and Why It Is Important Would-be entrepreneurs hoping to start a new venture and novice entrepreneurs with fledgling businesses get a summary of the essential ingredients of successful entrepreneurship from reading this chapter. The book gives them deep insights into how to start and grow a viable business. The material is important because this book is a manual on best entrepreneurial practices spelled out by leading experts who teach and mentor entrepreneurs. Introduction This is the age of entrepreneurship. It is estimated that as many 500 million persons worldwide were either actively involved in trying to start a new venture or were ownermanagers of a new business in 2008.1 More than a thousand new businesses are born every hour of every working day in the United States. Entrepreneurs are driving a revolution that is transforming and renewing economies worldwide. Entrepreneurship is the essence of free enterprise because the birth of new businesses gives a market economy its vitality. New and emerging businesses create a very large proportion of innovative products and services that transform the way we work and live, such as personal computers, software, the Internet, biotechnology drugs, and overnight package deliveries. They also generate most of the new jobs. Since the mid-1990s, small businesses have created 60 to 80 percent 1 2 The Portable MBA in Entrepreneurship of net new jobs. In 2005—the most recent year with data—companies with fewer than 500 employees created 979,102 net new jobs or 78.9 percent, while large companies with 500 or more employees added 262,326 net new jobs or 21.1 percent. If the small business sector of the U.S. economy were a nation, its GDP would rank third in the world behind the U.S. medium- and big-business sector and the entire economy of Japan, and far ahead of the economies of Germany, the United Kingdom, France, Italy, and China.2 There has never been a better time to practice the art and science of entrepreneurship. But what is entrepreneurship? Early in the 20th century, Joseph Schumpeter, the Moravian-born economist writing in Vienna, gave us the modern definition of an entrepreneur as the person who destroys the existing economic order by introducing new products and services, by creating new forms of organization, or by exploiting new raw materials. According to Schumpeter, that person is most likely to accomplish this destruction by founding a new business but may also do it within an existing one. But very few new businesses have the potential to initiate a Schumpeterian gale of creation-destruction as Apple computer did in the computer industry. The vast majority of new businesses enter existing markets. In The Portable MBA in Entrepreneurship, we take a broader definition of entrepreneurship than Schumpeter’s. Ours encompasses everyone who starts a new business. Our entrepreneur is the person who perceives an opportunity and creates an organization to pursue it. And the entrepreneurial process involves all the functions, activities, and actions associated with perceiving opportunities and creating organizations to pursue them. Our entrepreneur’s new business may, in a few rare instances, be the revolutionary sort that rearranges the global economic order as WalMart, Fedex, and Microsoft have done, and amazon.com, eBay, and Google are now doing. But it is much more likely to be of the incremental kind that enters an existing market. The Changing Economy General Motors (GM) was founded in 1908 as a holding company for Buick. On December 31, 1955, General Motors became the first American corporation to make over $1 billion in a year. At one point it was the largest corporation in the United States in terms of its revenues as a percent of GDP. In 1979, its employment in the United States peaked at 600,000. In 2008 GM reported a loss of $30.9 billion and burned through $19.2 billion of cash. In a desperate attempt to save the company in February 2009, GM announced plans to reduce its total U.S. workforce from 96,537 people in 2008 to between 65,000 and 75,000 in 2012. By March 2009, GM, which had already received $13.4 billion of bailout money from the U.S. government, was asking an additional $16.6 billion. The Obama Administration forced GM’s CEO, Rick Wagoner, to resign; his replacement, Fritz Henderson, said that bankruptcy was a real possibility. On June 1, GM filed for bankruptcy. Wal-Mart was founded by Sam Walton in 1962. For the year ended January 31, 2008, Wal-Mart had record sales of $374.5 billion, record earnings of $22 billion, and record free cash flow of $5.4 billion. During 2008, Wal-Mart added 191 The Entrepreneurial Process 3 supercenters in the United States and opened its 3,000th international unit. Wal-Mart is the world’s largest corporation, with 1.4 million associates in the United States. We’re all working together; that’s the secret. And we’ll lower the cost of living for everyone, not just in America, but we’ll give the world an opportunity to see what it’s like to save and have a better lifestyle, a better life for all. We’re proud of what we’ve accomplished; we’ve just begun. —Sam Walton (1918–1992) An entrepreneur is someone who perceives an opportunity and creates an organization to pursue it. The entrepreneurial process involves all the functions, activities, and actions associated with perceiving opportunities. Is the birth of a new enterprise just happenstance and its subsequent success or demise a haphazard 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 the fastest growing new field of study in American higher education. It was estimated that more than 2,000 U.S. colleges and universities—approximately two-thirds of the total—were teaching entrepreneurship in 2009. 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 three decades or so. The process of creating a new business is well understood. Yes, entrepreneurship can be taught. However, we cannot guarantee to produce a Bill Gates or a Donna Karan, any more than a physics professor can guarantee to produce an Albert Einstein, or a tennis coach a Venus Williams. But give us students with the aptitude to start a business, and we will make them better entrepreneurs. Critical Factors for Starting a New Enterprise We will begin by examining the entrepreneurial process (see Exhibit 1.1). What we are talking about here are the factors—personal, sociological, and environmental—that give birth to a new enterprise. A person gets an idea for a new business through either a deliberate search or a chance encounter. Whether he decides to pursue that idea depends on factors such as his alternative career prospects, family, friends, role models, the state of the economy, and the availability of resources. 4 The Portable MBA in Entrepreneurship Personal Personal Sociological Personal Organizational Achievement Locus of control Ambiguity tolerance Risk taking Personal values Education Experience Opportunity recognition Risk taking Job dissatisfaction Job loss Education Age Gender Commitment Resources Networks Teams Parents Family Role models Advisers Entrepreneur Leader Manager Commitment Vision Team Strategy Structure Culture Products Innovation Triggering Event Implementation Growth Environment Environment Environment Opportunities Role models Creativity Economy Competition Resources Incubator Government policy Competitors Customers Suppliers Investors Bankers Lawyers Resources Government policy Economy Exhibit 1.1 A Model of the Entrepreneurial Process Source: Carol Moore, “Understanding Entrepreneurial Behavior,” in J. A. Pearce II and R. B. Robinson, Jr., eds., Academy of Management Best Paper Proceedings, Forty-sixth Annual Meeting of the Academy of Management, Chicago (1986). 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 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 book stores 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; they exploited legislation deregulating the UK 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; 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. The Entrepreneurial Process 5 For other people, entrepreneurship is a deliberate career choice. Babson College specializes in teaching entrepreneurship to undergraduates and MBA students. Many of them have chosen the school because they know that they want to start their own ventures rather than work for someone else. Some of them launch their ventures while they are still students and continue full-time with them as soon as they graduate. Others go and work for someone else for a few years to gain experience before they launch their ventures. A recent survey of Babson alums found that 40 percent of those who had studied entrepreneurship in college had launched one or more full-time businesses. 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 happened upon a 120,000-square-foot store called Homeco, operating in Long Beach, California. The two instantly realized that the concept—an oversize store, packed with merchandise 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. Source: Bernie Marcus and Arthur Blank with Bob Andleman, Built from Scratch. New York: Times Business, Random House, 1999. A survey by ACNielsen International Research in July 2005 found the following: r Approximately 58 percent of Americans say they’ve dreamed of starting a business and becoming their own boss. r The most common reason for wanting to start a business is to increase one’s personal income (66 percent of respondents), followed by increased independence (63 percent). r The primary barriers to starting a business are insufficient financial resources (cited by 49 percent of respondents) and satisfaction with their current situation (29 percent). Source: http://www.forbes.com/businesswire/feeds/businesswire/2005/07/21/businesswire20050721005296r1 .html.