Chapter 06 – Entrepreneurship and Starting a Small Business
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PPT 6-42
Sources of Capital
SOURCES of CAPITAL
6-42
LO 6-4
• Personal savings
• Relatives
• Former employers
• Banks & finance companies
• Government agencies
• Angel investors
• Venture capitalists — Individuals or companies
that invest in new businesses in exchange for partial
ownership.
One reason that businesses fail is a lack of capital. Capital
can come from internal sources (personal saving, employ-
ees, etc.) or from external sources (relatives, banks and
angel investors). One source of external funding is venture
capital. Venture capitalists are individuals or companies
that invest in new businesses in exchange for a stake in
ownership. Many well-known businesses, such as Google,
Zappos and Apple, received a first round of funding from
venture capitalists.
PPT 6-43
Funding Your Dream
FUNDING YOUR DREAM
Getting Cash When Financing Isn’t an Option
6-43
LO 6-4
1. Get close to your customers.
2. Make clients pay upfront.
3. Outsource tasks on the cheap.
4. Get in front of customers quickly.
5. Become an expert.
6. Ask for help.
7. Be patient.
Source:Inc.,www.inc.com,October2014.
1. Financing is hard to come by in this economy.
2. This slide outlines Seth Godin’s advice on how to
self-fund start-ups.
PPT 6-44
Community Development Financial In-
stitutions
COMMUNITY DEVELOPMENT
FINANCIAL INSTITUTIONS
6-44
LO 6-4
• CDFIs are playing a big role in the economic
recovery.
• First formed in the early 1980s; by 2009, over $1
billion flowed into CDFIs from investment
companies.
• Only 1% of loans were not paid back in the last 30
years!
Chapter 06 – Entrepreneurship and Starting a Small Business
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PPT 6-45
States Test New Crowdinvesting Rules
STATES TEST NEW
CROWDINVESTING RULES
6-45
• Sites like Kickstarter and
Indiegogo have connected
loan seekers to potential
lenders.
• When the JOBS Act was
passed in 2012, the goal
was to make crowdfunding
more accessible.
• It’s still too early to know
how this will affect
companies and investors.
PPT 6-46
The Small Business Administration
The SMALL BUSINESS
ADMINISTRATION
6-46
LO 6-4
• Small Business Administration (SBA) — A U.S.
government agency that advises and assists small
businesses by providing management training and
financial advice.
• SBA started a microloan program in 1991 that
provides very small loans to small business
owners.
• Program judges worthiness based on the
borrowers’ integrity and soundness of their
business ideas.
The importance of small business to the U.S. economy
cannot be overstated. The SBA is the government agency
that advises and assists small businesses with financial
advice and management training. For more information
on the SBA visit their website at www.sba.gov.
PPT 6-47
The Small Business Investment
Company
The SMALL BUSINESS
INVESTMENT COMPANY
6-47
LO 6-4
• Small Business Investment Company (SBIC) —
A program through which private investment
companies licensed by the SBA lend money to small
businesses.
• A SBIC must have a minimum of $5 million in
capital and can borrow up to $2 from the SBA for
each $1 of capital it has.
• SBICs are able to identify a business’s trouble
spots early, giving entrepreneurs advice, and in
some cases rescheduling loan payments.
Chapter 06 – Entrepreneurship and Starting a Small Business
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PPT 6-48
Small Business Development Centers
SMALL BUSINESS
DEVELOPMENT CENTERS
6-48
LO 6-4
• Small Business Development Centers (SBDC) are
funded jointly by the federal government and
individual states.
• SBDCs are able to evaluate the feasibility of your
idea, develop your business plan and complete
your funding application – for no charge.
PPT 6-49
Help Please!
HELP PLEASE!
More SBA Resources and Other Helpful Groups
6-49
LO 6-4
• Small Business
Investment Companies
• The Office of Innovation
& Entrepreneurship
• SCORE
• Entrepreneurship.org
1. These are other sources for helpful information
about starting and running a small business.
2. Encourage students to go to these websites to
learn what services each offers.
PPT 6-50
The Market
KNOWING the MARKET
6-50
LO 6-4
• Market — Consumers with unsatisfied wants and
needs who have both resources and willingness to
buy.
• Set out to fill the market’s needs by offering top
quality and great service at a fair price.
• One of the great advantages of small businesses
is the ability to know the market and quickly
adapt to market needs.
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PPT 6-51
Beyond Knowing What Your Custom-
ers Need
BEYOND KNOWING WHAT YOUR
CUSTOMERS NEED
6-51
• Quirky allows customers to
take part in designing
products.
• Anyone in the community
can take part in design,
style, naming, packaging,
and pricing.
• Products are sold through
the site and can even be
found in brick and mortar
stores.
PPT 6-52
Managing Employees
MANAGING EMPLOYEES
6-52
LO 6-4
• Hiring, training and motivating employees is
critical.
• Employees of small companies are often more
satisfied with their jobs – they feel challenged
and respected.
• Entrepreneurs best serve themselves and the
business if they recruit and groom employees
for management positions.
PPT 6-53
Accounting Assistance
ACCOUNTING ASSISTANCE
6-53
LO 6-4
• Computers simplify the process by helping with
inventory control, customer records and payroll.
• A good accountant can help in:
– Deciding whether to buy or lease equipment.
– Deciding whether to own or rent a building.
– Tax planning.
– Financial forecasting.
– Choosing sources of financing.
– Writing requests for funds.
The most important assistance to small-business owners is
in accounting.
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PPT 6-54
Legal Help
LEGAL HELP
6-54
LO 6-4
• Owners need outside consulting advice early in
the process.
• Small and medium-sized firms cannot afford to
hire experts as employees.
• A competent lawyer can help with:
– Leases
– Contracts
– Partnership agreements
– Protection against liabilities
PPT 6-55
Marketing Research
MARKETING RESEARCH
6-55
LO 6-4
• Marketing decisions need to be made long before
introducing a product or opening a store.
• A marketing research study can help you:
– Determine where to locate.
– Whom to select as your target market.
– What is an effective strategy for reaching the
market.
If marketing is about finding and filling customer needs,
how can an entrepreneur better understand what custom-
ers need? Market research helps determine where to locate
customers, whom to target as customers, and an effective
strategy for reaching the market.
PPT 6-56
Other Forms of Help
OTHER FORMS OF HELP
6-56
LO 6-4
• A commercial loan officer can help:
– Design an acceptable business plan.
– Give financial advice.
– Lend money.
• An insurance agent can help you:
– Know the risks associated with the business.
– How to cover risks with insurance.
– How to prevent risks with safety devices.
• Service Corps of Retired Executives
– More than 13,000 volunteers from industry, trade
associations, and education who counsel small business at
no cost.
Asking good questions is the key to success in any busi-
ness. Fortunately for entrepreneurs some of the best ad-
vice comes free. Commercial loan officers can help with
the creation of a business plan as well as financial advice.
Insurance agents can help new entrepreneurs understand
and insure against risk. One interesting and free source of
information is SCORE, Service Corps of Retired Execu-
tives. To start a discussion in class, have students research
SCORE (www.score.org) and the programs offered at lo-
cal SCORE offices.
Chapter 06 – Entrepreneurship and Starting a Small Business
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PPT 6-57
What Went Wrong?
WHAT WENT WRONG?
Five Mistakes Business Owners Make
6-57
LO 6-4
1. They’re too afraid to take the leap!
2. They hire the wrong people.
3. They don’t want to give up control.
4. They become complacent.
5. They fail to see new opportunities.
Source: Alan Hughes, www.blackenterprise.com, accessed September 2014.
1. This slide explains five key mistakes business
owners make.
2. Ask students: Why do you think these mistakes
are made? Why is giving up control a problem?
PPT 6-58
Progress Assessment
TEST PREP
6-58
• A business plan is probably the most important
document a small business owner will ever
create. There are nine sections in the business
plan outline. Can you describe at least five
sections of a business plan?
A business plan needs to start with a strong cover letter.
The nine key sections are: (a) executive summary, (b)
company background, (c) management team, (d) financial
plan, (e) capital required, (f) marketing plan, (g) location
analysis, (h) manufacturing plan, and (i) appendix.
PPT 6-59
Small Business Prospects Abroad
SMALL BUSINESS PROSPECTS
ABROAD
6-59
LO 6-5
• Small– and medium-sized businesses accounted
for 99% of recent export growth.
• Advantages of global trade for small businesses:
– Overseas buyers enjoy dealing with individuals.
– Small companies can usually begin shipping
much faster.
– They provide a wide variety of suppliers.
– They can give more personal service and
attention.
Chapter 06 – Entrepreneurship and Starting a Small Business
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PPT 6-60
Progress Assessment
TEST PREP
6-60
• Why do many small businesses avoid doing
business globally?
• What are some of the advantages small
businesses have over large businesses in selling
in global markets?
1. Key reasons why many small businesses avoid doing
business overseas include: (a) financing is often diffi-
cult to find, (b) would-be exporters don’t know how
to get started and do not understand the cultural dif-
ferences between markets, and (c) the bureaucratic
paperwork can threaten to bury a small business.
2. Small businesses have several advantages over large
businesses in global markets. These include: (a) glob-
al buyers often enjoy dealing with individuals rather
than with large corporate bureaucracies, (b) small
companies can usually begin shipping much faster,
(c) small companies can provide a wide variety of
suppliers, and (d) mall companies can give global
customers personal service and undivided attention
because each overseas account is a major source of
business for them.
Chapter 06 – Entrepreneurship and Starting a Small Business
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lecture
enhancers
“Our company has, indeed, stumbled onto some of its new products. But never for-
get that you can only stumble if you are moving.”
Richard P. Carlton, Former CEO, 3M Corporation
“Imagination is more important than knowledge.”
Albert Einstein
“The greater the difficulty, the more glory in surmounting it. Skillful pilots gain
their reputation from storms and tempests.”
Epictetus
“Keep away from small people who try to belittle your ambitions. Small people al-
ways do that, but the really great make you feel that you, too, can become great.”
Mark Twain
lecture enhancer 6-1
HISTORY’S GREATEST ENTREPRENEURS
Mention successful entrepreneurs today, and the names that come to mind include Bill Gates,
Sam Walton, and Ted Turner, to name a few. But who are the greatest entrepreneurs of all time? MSNBC
recently posted a listing of its picks. The finalists are men (sorry, no women) who excelled at taking capi-
tal and using it to create more capital.
10. Steve Jobs and Steve Wozniak. Jobs and Wozniak weren’t the first Silicon Valley entrepreneurs,
but they were the first to successfully market a truly revolutionary device—the personal comput-
er.
9. H. Ross Perot. In the 1990s, Perot become known for his political aspirations. However, his en-
trepreneurial fame involves his creation of EDS (Electronic Data Systems). Perot saw that big
corporations needed data-processing help and developed an enterprise providing it.
8. Ray Kroc. At the age of 52 Kroc bought out a small restaurant chain and launched a giant retail
enterprise. Kroc’s winning strategy⎯a limited menu, fast service, and low prices⎯launched
McDonald’s and created the fast-food industry.
7. Benjamin Siegel. Better known as “Bugsy,” Siegel singlehandedly invented Las Vegas and at-
tracted big investors to build the resorts. Unfortunately, some of these investors belonged to the
Mob.
6. Henry Ford. Ford revolutionized human lifestyles by making transportation affordable to the
average American. He also designed the moving assembly line, a breakthrough concept in indus-
try.
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5. Thomas Edison. Edison was probably the world’s greatest inventor—the electric light, the pho-
nograph, talking motion pictures, and more than 1,300 other inventions. Unlike other inventors,
he also succeeded in exploiting the profit potential of his creations, something other inventors
have failed to do.
4. P. T. Barnum. Americans have always loved a spectacle. Barnum catered to this fascination with
the Barnum and Bailey Circus. Along the way, he invented modern advertising and became rich.
3. Benjamin Franklin. Franklin is best known as one of the founders in America’s early history. In
addition to being a diplomat, Franklin was also a popular author, a printer, an inventor, and a
savvy businessman.
2. Pope Sixtus IV. Pope Sixtus was the first to realize that there was money to be made in sin and
death. He saw a lucrative market selling “indulgences” for the dead. Relatives of the dead lined
up and filled the Vatican’s coffers. He then expanded the death market by authorizing the Spanish
Inquisition. Sixtus was also the first pope to license brothels.
1. King Croesus. Croesus ruled the Asia Minor kingdom of Lydia in the sixth century B.C. He is
famous for minting the world’s first coinage. His extravagant lifestyle has also given generations
of entrepreneurs something to shoot for—to be as “rich as Croesus.”i
lecture enhancer 6-2
CHARLES BABBAGE: 19TH-CENTURY ENTREPRENEUR
Nineteenth-century England was not ready for Charles Babbage. The mathematician had already
proven his ingenuity by inventing the speedometer, the cowcatcher, and the first reliable life-expectancy
tables when his enthusiasm turned to the problem of calculations. His first machine, which was designed
to calculate logarithms, was an intricate system of gears and cogs, which he called the Differential En-
gine.
No sooner had the Differential Engine been completed than Babbage proposed an expanded ma-
chine: one with a central “mill” for performing logical operations, a “store” or memory to hold infor-
mation, and means to put information in and retrieve it. In short, all the elements of a modern computer.
The Analytical Engine became his obsession. Along with his patron, Ada the Countess of Lovelace, he
worked for nearly 40 years to perfect it. Ada, Lord Byron’s mathematically gifted daughter, wrote the
initial set of instructions for the Engine, the world’s first computer program.
When Babbage died in 1871, all he had to show of his machine were thousands of sketches—the
machine was never built. In order to perform the intricate calculations he developed, the Engine’s parts
had to be machined to precise tolerances. No craftsperson of the age could do so. If it had been built, the
Analytical Engine would probably have been as big as a football field and would have required half a
dozen locomotive engines to power it.
lecture enhancer 6-3
OVERCOMING THE ODDS THROUGH ENTREPRENEURSHIP
When Kevin Hartford lost his consulting job in the mid-1990s, the knowledge and expertise he
gained after years of hard work should have been enough to land him another job quickly. However, po-
tential employers became hung up on one particular item not included on Hartford’s resume: his stutter.
While his speech impediment had never been a problem at his previous job, Hartford says that it put off
recruiters as he went on countless interviews. “I applied for job after job after job,” says Mr. Hartford. “I
was one of two finalists; I was one of three finalists. But I never got the job.”
Chapter 06 – Entrepreneurship and Starting a Small Business
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After years of searching, Hartford gave up and began taking menial jobs throughout the Pitts-
burgh area. For years he delivered packages, glued together medical supplies in a factory, sorted mail and
worked on a landscaping crew. Although this work paid the bills, Hartford became embarrassed about his
lost status amongst his peers. He continued to pay his country club dues, but he stopped golfing out of
fear of being questioned about his career.
Sensing Hartford’s unhappiness, his wife and some friends suggested that he go into business for
himself. One person recommended buying a metal-parts shop, a common enterprise in industrial Pitts-
burgh. With the help of a partner, in 2005 Hartford obtained a bank loan for $2 million to renovate an old
shop called Gentile Manufacturing. The risky business move required Hartford to put his retirement sav-
ings up for collateral. The gamble paid off, though, and since then Gentile has grown to a staff of 38 em-
ployees bringing in $6 million in annual sales. Hartford’s uplifting story is shared by the 11 percent of
disabled Americans who are also self-employed. For many of these entrepreneurs, going into business for
one’s self is the only option after being shunned by other employers. It just goes to show that even some
business professionals have a thing or two to learn about not judging a book by its cover.ii
lecture enhancer 6-4
MORE ENTREPRENEURS LAUNCH FROM HOME
In an effort to boost local economies, states and cities nationwide are amending zoning laws to
make it easier for entrepreneurs to set up shop at home. For years local governments either banned home
businesses outright or riddled them with red tape, such as requiring potential owners to seek approval
through public hearings. But over the past decade restrictions have eased, paving the way for home busi-
nesses ranging from food makers to music instructors.
Small businesses often drive economic recoveries, but the severity of the recent financial crisis
has made it difficult for many new companies to start strong. As a result, today’s entrepreneurs oftentimes
launch out of home to avoid the costs of acquiring office space. A recent survey found that 69 percent of
new businesses in the U.S. start from home. What’s more, experts estimate that home enterprises make up
half of the nation’s 28 million small businesses. With governments across the board desperate for tax rev-
enue, legislators are quickly altering zoning codes to accommodate these new ventures. For instance, in
October an Atlanta suburb dropped the requirement of a public hearing to approve home businesses.
Meanwhile, Polk, North Carolina, made its first zoning change in 20 years by lifting its ban on home
businesses.
These suburban operations aren’t encouraged too enthusiastically, however. Restrictions still ap-
ply in many places against how often delivery drivers can come and go through neighborhoods. In some
cases, small towns end up retightening laws if they receive complaints about increased traffic or noise.
Home businesses are also advised to shift to office space or incubators if they see a big increase in cus-
tomer demand. In fact, Louisiana recently placed a revenue cap of $20,000 on home food businesses. This
ensures that these companies don’t get so big that they require commercial kitchen licenses. In light of
these circumstances, then, entrepreneurs should look at home businesses as strong starting points but not
long term solutions.iii
lecture enhancer 6-5
LURING ENTREPRENEURS WITH SPECIAL VISAS
In the business world, it’s not just companies who are concerned with attracting top tier talent.
Governments, too, have a vested interest in either retaining their most skilled individuals or attracting the
best from elsewhere. After all, an innovative and educated workforce can only sustain itself by remaining
Chapter 06 – Entrepreneurship and Starting a Small Business
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desirable to other capable candidates. For countries like India, this means keeping doctors and engineers
local so they can help a homeland in need rather than travel abroad for greater fortunes.
While experts like these are essential for society, other nations are attempting to lure an especially
modern type of specialist to their shores—entrepreneurs. Countries such as Australia, Chile and the U.K.
have all recently introduced new visa programs that grant residency to established, economically viable
startups. But while this presents incentive for some businesses to relocate, it does little to foster a support-
ive environment for up-and-coming entrepreneurs. Nevertheless, those in the latter camp would do well to
look to Canada as a land of opportunity: any foreign national receiving funding from a list of approved
venture capital agencies is eligible for immediate permanent residency.
With one of the most open immigration policies in operation, Canada is already a welcoming
place for people the world over. But with this pilot program, the nation is hoping to attract a young gener-
ation of entrepreneurs who would otherwise relocate to the Bay Area. It also increases the chances that
investors will place their money into Canadian companies. “If a Canadian venture capitalist is going to
invest in a startup, we’d rather that business [be located] in Canada than India or Silicon Valley or some-
where else overseas,” says Canada’s immigration minister. Over on the American side of the border, simi-
lar legislation has been introduced to Congress several times, but the issue has inevitably stalled due to
conflict dealing with the larger issue of comprehensive immigration reform.iv
lecture enhancer 6-6
SU LABS ALTRUISTIC BUSINESS INCUBATOR
For many budding tech entrepreneurs, getting accepted into a prestigious business incubator is
almost as important as receiving a diploma from Stanford. The jolt of capital and resources provided by
accelerator programs like Y Combinator or Techstars often act as springboards into multimillion-dollar
successes. But not all startups want to become the next Google. Some would rather operate more like the
Bill Gates Foundation by applying their innovative skills to addressing major world problems. While
these aims are certainly noble, they aren’t exactly appealing to the Bay Area’s profit–minded incubators.
Luckily, Singularity University’s new accelerator program, SU Labs, caters specifically to com-
panies wanting to make a positive impact on the planet. Many of the program’s participants are students
of the unorthodox Silicon Valley college, which specializes in teaching business skills for this world of
ever-changing technology. SU Labs furthers that aim by accepting only the most innovative and altruisti-
cally minded applicants for its incubator. “We’re not going to take a company that might make a nice re-
turn but has no value in terms of what we call ‘humanity grand challenges,’” says SU Labs’ VP of strate-
gy Gabriel Baldinucci.
Most high-level accelerator programs require startups to exchange as much as 6 percent of their
equity for a quick splash of capital, usually in the region of $10,000 plus bonuses. Given the non-profit
nature of its incubator, SU Labs only takes a 3 percent stake in its charges. What’s more, its startups re-
ceive office space, mentoring, and access to SU Lab’s alumni network in perpetuity. All SU Labs asks for
in return is a workable idea that will likely have a positive effect on at least 1 billion people within a dec-
ade. That doesn’t mean that SU Labs only fosters companies focused on charity and medicine. For in-
stance, the car-sharing startup Getaround was a member of the incubator’s first graduating class. Alt-
hough the company wouldn’t be considered a non-profit, its green-minded, peer-to–peer car-lending mod-
el should nonetheless improve the world by limiting auto emissions.v
Chapter 06 – Entrepreneurship and Starting a Small Business
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lecture enhancer 6-7
A NEW KING OF BEERS IN ST. LOUIS
When the Belgian beer conglomerate InBev bought Anheuser-Busch in 2008, many residents in
A-B’s hometown of St. Louis saw the takeover as a betrayal. The brewer had been headquartered in the
River City since 1852 and reigned for decades as the area’s undisputed “King of Beers” with near total
market dominance. But much of the city’s goodwill faded fast once the company’s new foreign owners
dropped the axe hard on St. Louis. Of the 1,400 jobs InBev slashed just weeks after acquiring the compa-
ny, 75% of those layoffs occurred at A-B’s erstwhile home base.
As Budweiser’s dominance of St. Louis wanes, local craft brands like Schlafly Beer are taking up
the mantle as the new beer barons of the Midwest. When Schlafly first began brewing in 1991, the com-
pany’s founders were seen as upstarts at best and heretics at worst. President Tom Schlafly likened the
notion of opening a microbrewery in St. Louis at the time to selling a foreign car in Detroit. The brewery
flourished nevertheless and soon became a staple of discerning bars across the area.
But it wasn’t until A–B’s merger with InBev that Schlafly managed a major push into the main-
stream of America’s beer capital. Once upon a time the company couldn’t convince the area’s fiercely
loyal A-B bars to stock even one keg of Schlafly Pale Ale. Now the brewery boasts more than 2,000 taps
in the St. Louis area, 30% of which were added between 2009 and 2011. Overall sales jumped the same
amount in 2009 along with a 17% boost in revenue. Schlafly hasn’t unseated A-B from its throne, howev-
er, with the multinational still controlling 68% of the St. Louis beer market versus Schlafly’s 1.5%. The
bulk of A-B’s dominance comes from its immense size: In a single year its St. Louis facility brews more
product than the entire craft brewing industry nationwide. Regardless of its relatively small operation,
though, Schlafly is making some major headway into areas once forbidden to other brewers, such as its
eight taps in St. Louis’s once Bud–exclusive Busch Stadium.vi
lecture enhancer 6-8
FAILURE IS THE BEST MEDICINE
Americans tend to think that failure is something to be ashamed of, a personal defeat. Paul Saffo,
director of Institute for the Future, believes that failure, particularly in the high-tech companies of Silicon
Valley, is a blessing.
Saffo compares failure to the cleansing fires that clean out old growth in forests and create space
for new life. In the heady years of the dot-com boom, Silicon Valley was awash with too many people,
too many expensive houses, too little office space, and too much money chasing too few start–ups. “Fail-
ure is the safety valve, the destructive renewing force that frees up people, ideas, and capital and recom-
bines them, creating new revolutions,” says Saffo.
Saffo points to the history of the Internet. In 1989, the World Wide Web was invented by Tim
Berners-Lee, a British engineer, for use in interactive television. Half a world away, the Internet revolu-
tion gained momentum, fueled by a lucky failure. Just as Berners-Lee launched the Web, the interactive
television industry was collapsing. Hundreds of millions of dollars were lost and dozens of start-ups
failed. One important byproduct this collapse was a large pool of laid-off C++ programmers who were
expert in multimedia design and out on the street looking for a new venture.