CHAPTER 6
MANAGING SMALL BUSINESS START-UPS
CHAPTER OUTLINE
Do You Think Like an Entrepreneur?
I. What Is Entrepreneurship?
II. Impact of Entrepreneurial Companies
A. Entrepreneurship Internationally
IV. Social Entrepreneurship
V. Launching an Entrepreneurial Start-Up
A. Starting with an Idea
B. Writing the Business Plan
C. Choosing a Legal Structure
D. Arranging Financing
New Manager Self-Test: Perceived Passion
ANNOTATED LEARNING OBJECTIVES
After studying this chapter, students should be able to:
1. Define entrepreneurship and the four classifications of entrepreneurs.
Entrepreneurship is the process of initiating a business venture, organizing the necessary
resources, and assuming the associated risks and rewards. They can be classified into five
categories.
• Idealists who like the idea of working on something new, creative, and personally
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2. Describe the importance of entrepreneurship to the global and U.S. economies.
Globally, entrepreneurship has experienced a tremendous boost due to huge advances in
3. Appreciate the impact of minority- and women-owned businesses.
As the minority population of the United States has grown, so has the number of minority-
owned businesses. The number of minority-owned businesses accounts to a total of 5.8
4. Define the personality characteristics of a typical entrepreneur.
Seven personality traits associated with entrepreneurship have special importance.
Autonomy. Entrepreneurs driven by the desire for autonomy cherish the freedom of making
their own decisions about their business. Because of this desire, they consider flying solo,
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5. Explain social entrepreneurship as a vital part of today’s small business environment.
Social entrepreneurs are people who are committed to both good business and positive social
change. They create new business models that meet critical human needs and solve important
6. Outline the planning necessary to launch an entrepreneurial start-up.
Starting with an Idea – skill and market need must both be present
Writing the Business Plan – a document specifying the business details prepared by an
entrepreneur prior to opening a new business
7. Describe the five stages of growth for an entrepreneurial company.
Start-up. In the initial stage, the main problems are producing the product or service and funding
the business. Key issues are attracting enough customers and money to survive.
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8. Explain how the management activities of planning, organizing, decision making, and
controlling apply to a growing entrepreneurial company.
In the early start-up stage, formal planning tends to be nonexistent except for the business plan.
The primary goal is to stay alive. Formal planning usually is not instituted until the success
stage. The growing importance of e-business means entrepreneurs have to plan and allocate
resources for Internet operations from the beginning and grow those plans as the company
grows.
LECTURE OUTLINE
DO YOU THINK LIKE AN ENTREPRENEUR?
Entrepreneurs face many demands. Improvisation is a correlate of entrepreneurial intentions.
Entrepreneurial improvisation consists of three elements: the ability to produce novel solutions
under constrained conditions; the ability to excel under pressure-filled circumstances; and the
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determination to achieve goals and solve problems in the moment. This exercise helps students
determine whether they have the inclination to start and build their own businesses.
I. WHAT IS ENTREPRENEURSHIP? Exhibit 6.1
Entrepreneurship is the process of initiating a business venture, organizing the necessary
Entrepreneurs have many different motivations and measure rewards in different ways. They
can be classified into five categories.
• Idealists who like the idea of working on something new, creative, and personally
meaningful.
Many people regard entrepreneurship as a better use of their time, talent, and energy. Women
and minorities, who have found corporate opportunities more limited, often see entrepreneurship
as the only way to go.
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II. Impact of Entrepreneurial Companies
Small businesses have been hit particularly hard by the global economic crisis and weak
A. Entrepreneurship Internationally
1. Globally, entrepreneurship has experienced a tremendous boost due to huge advances
B. Entrepreneurship in the United States
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1. The impact of entrepreneurial companies on the U.S. economy is astonishing. In the
United States, small businesses create two out of every three jobs. Small businesses
represent 98 percent of all businesses in the United States. Entrepreneurship and
small businesses are the engines behind job creation and innovation.
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III. WHO ARE ENTREPRENEURS?
The heroes of American business—Henry Ford, Steve Jobs, Sam Walton, Bill Gates, Oprah
characterized as hardworking and practical, with great familiarity with their market and industry.
A. Minority-Owned Businesses
1. As the minority population of the United States has grown, so has the number of
minority-owned businesses. The number of minority-owned businesses increased by
B. Women-Owned Businesses
1. Women are also embracing entrepreneurial opportunities in greater number in a range
of industries like business services, health care, and communication. However, most
businesses don’t grow as they do not hire people. Another challenge faced by women
is the stark imbalance of the sexes in high-tech fields.
Discussion Question #3: Why would small business ownership have great appeal to immigrants,
women, and minorities?
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C. Traits of Entrepreneurs Exhibit 6.5
1. In general, entrepreneurs seem to want something different from life than do
traditional managers. Seven personality traits associated with entrepreneurship have
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special importance.
a. Autonomy. The desire for autonomy is reportedly the primary motivator for
b. Entrepreneurial Struggle. The ability to persevere and stay positive after long
periods of struggle is another common trait among entrepreneurs.
e. Need to achieve. The need to achieve is a human quality linked to
entrepreneurship that means people are motivated to excel and pick situations in
which success is likely. People with high achievement needs like to set their own
goals that are moderately difficult.
f. Self-confidence. People who start and run a business must act decisively and need
confidence about their ability to master the day-to-day tasks of the business.
Discussion Question #4: Consider the seven characteristics of entrepreneurs described in the
chapter. Which two traits do you think are most like those of managers in large companies?
Which two are least like those of managers in large companies?
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IV. SOCIAL ENTREPRENEURSHIP
Social entrepreneurs are people who are committed to both good business and positive social
change. They create new business models that meet critical human needs and solve important
problems that remain unsolved by current economic and social institutions.
V. LAUNCHING AN ENTREPRENEURIAL START-UP
A. Starting with an Idea Exhibit 6.6
1. Some people are inspired to choose entrepreneurship by exciting ideas. Others decide
to start their own businesses and go looking for an idea. The trick for entrepreneurs is
1. A business plan is a document specifying the business details prepared by an
entrepreneur prior to opening a new business. Planning forces the entrepreneur to
carefully think through the issues and problems associated with starting and
developing the business. Small businesses with a carefully thought out, written
business plan are much more likely to succeed than those without one. The details
may vary, but successful business plans generally share several characteristics:
a. Demonstrate a clear, compelling vision that creates an air of excitement.
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Discussion Question #6: Many successful entrepreneurs say that they did little planning,
perhaps scratching notes on a legal pad. How was it possible for them to do well, even so?
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C. Choosing a Legal Structure
1. Sole Proprietorship
a. A sole proprietorship is an unincorporated business owned by an individual for
2. Partnership
a. A partnership is an unincorporated business owned by two or more people.
3. Corporation
a. A corporation is an artificial entity created by the state that exists apart from its
owners. As a separate legal entity, the corporation is liable for its actions and
D. Arranging Financing Exhibit 6.7
Most entrepreneurs are particularly concerned with financing the business. An investment
is required to acquire labor and raw materials, and perhaps a building and equipment as
well. The financing decision initially involves two options—whether to obtain loans that
must be repaid (debt financing) or whether to share ownership (equity financing).
1. Debt Financing
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a. Borrowing money that has to be repaid at a later date to start a business is referred
advice and assistance to the entrepreneur to help the business get started.
2. Equity Financing
a. Equity financing consists of funds that are invested in exchange for ownership in
the company either by owners or those who buy stock in the company.
b. A venture capital firm is a group of companies or individuals that invest money
NEW MANAGER SELF-TEST: PERCEIVED PASSION
An entrepreneur starting a business often has to make presentation to investors in order to
raise money. This test measures the persuasiveness of presentations to venture capitalists by
entrepreneurs in an effort to obtain investment money. Two aspects of the presentation
measured are passion and preparedness. Preparedness has the most positive impact on
decisions to invest money with entrepreneurs. Thus, a higher score on preparedness is more
important to investors than a high score on presentation passion.
A. Tactics for Becoming a Business Owner
Aspiring entrepreneurs can become business owners in several different ways. They can
start a new business from scratch, buy an existing business, start a franchise, or
participate in a business incubator.
1. Start a New Business
a. This approach is exciting to an entrepreneur who sees a need for a product or
2. Buy an Existing Business
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a. Purchasing an existing business offers the advantage of a shorter time to get
3. Buy a Franchise Exhibit 6.8
a. Franchising is perhaps the most rapidly growing path to entrepreneurship.
Franchising is a business arrangement where a firm collects upfront and ongoing
Discussion Question #5: How would you go about deciding whether you wanted to start a
business from scratch, buy an existing business, or buy into a franchise? What information
would you collect and analyze?
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4. Participate in a Business Incubator
a. A business incubator typically provides shared office space, management
support services, and management and legal advice to entrepreneurs. Incubators
1. Many entrepreneurs are turning to the Internet to expand their small businesses or
launch new ventures. Anyone with an idea, a personal computer, access to the
Internet, and the tools to create a website can start an online business. Two incentives
for starting an online business include a simple idea turning into a lucrative business
and the ability to work from home or any location. Several steps required to start an
online business are highlighted below.
a. Find a market niche. To succeed in the competitive online market, aspiring
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VI. MANAGING A GROWING BUSINESS
Often the traits of self-confidence, creativity, and internal locus of control lead to financial
and personal grief as the enterprise grows. We will now look at the stages through which
A. Stages of Growth Exhibit 6.10
1. Businesses go through distinct stages of growth, with each stage requiring different
management skills.
a. Start-up. In the initial stage, the main problems are funding the business, and
producing the product or service. Key issues are attracting enough customers and
money to survive.
b. Survival. In this stage, the business demonstrates that it is a workable business
B. Planning
1. In the early start-up stage, formal planning tends to be nonexistent except for the
business plan. The primary goal is to stay alive. Formal planning usually is not
1. In the first two stages of growth, the organization’s structure is very informal, with all
employees reporting to the owner. At about the success stage, functional managers
1. When managing a growing business, owners face masses of decisions that affect the
performance of the organization. These decisions may include determining inventory
1. Financial control is important in each stage of a firm’s growth. In the start-up and
survival stages, control is exercised by simple accounting records and personal
supervision. By the success stage, operational budgets are in place and the owner
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Suggested Answers to Discussion Questions
1. You are interested in being your own boss, and have the chance to buy a franchise coffee
and baked goods store that is for sale in your city. You will need outside investors to help
pay the franchise fees and other start-up costs. How will you determine if this is a good
entrepreneurial opportunity and make your decision about buying the store?
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Whether or not this is a good opportunity depends on several factors. One major factor is the
availability of outside investor funding for this venture. Of course, it would also be critical to
2. Over the past 20 years, entrepreneurship has been the fastest-growing course of study on
campuses throughout the country. Do you think it is possible to teach someone to be an
entrepreneur? Why or why not?
Students’ opinions will differ. Some people seem to have a knack for entrepreneurship, much
entrepreneurship can be taught.
3. Why would small business ownership have great appeal to immigrants, women, and
minorities?
4. Consider the seven characteristics of entrepreneurs described in the chapter. Which two
traits do you think are most like those of managers in large companies? Which two are
least like those of managers in large companies?
Self-confidence and need to achieve may be most likely to also be found in managers in large
5. How would you go about deciding whether you wanted to start a business from scratch,
buy an existing business, or buy into a franchise? What information would you collect and
analyze?
Starting a new business from scratch takes a long time, a great deal of effort, and perhaps
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To start from scratch, you would need to do an extensive research on the market, demographics,
6. Many successful entrepreneurs say that they did little planning, perhaps scratching notes
on a legal pad. How was it possible for them to do well, even so?
If an entrepreneur comes up with a product or service that is needed and not being supplied, this
7. What personal skills do you need to keep your financial backers feeling confident in your
new business? Which skills are most useful when you’re dealing with more informal
sources such as family and friends versus receiving funds from stockholders, a bank, or a
venture capital firm? Would these considerations affect your financing strategy?
Communication skills and persuasion skills would be very important in maintaining financial
backers’ confidence. You would need good communication skills to keep them informed of your
8. Many people who are successful at the start-up stage of a business are not the right people
to carry the venture forward. How do you decide whether you’re better suited to be a
serial entrepreneur (start the business and then move on to start another), or whether you
can guide the venture as it grows and matures?
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The early stages of a new business require tremendous energy as the owner handles nearly all of
the tasks by himself or herself. Even as the company begins to grow somewhat and hire a few
others, the owner may still be the only manager. These early stages are well suited to individuals
9. How does starting an online business differ from starting a small business such as a local
auto repair shop or delicatessen? Is it really possible for businesses that operate totally in
cyberspace to build close customer relationships? Discuss.
Starting an Internet business requires lower start-up capital because the initial “bricks and
mortar” investment can be nonexistent. At the beginning, it may only require Web space and
10. Describe the benefits of using social media to help a start-up gain traction during the early
stages of its life cycle. What are some possible disadvantages of using social media?
Social media sites, such as Facebook, Twitter, and YouTube have the potential to be powerful
tools for small business owners. The benefits of using social media include gaining valuable
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Apply Your Skills: Experiential Exercise
What’s Your Entrepreneurial IQ?
Students should total the score for the 15 items. A score of 50-60 points suggests a strong
Apply Your Skills: Small Group Breakout
What Counts?
This exercise asks students to rank eight qualities experts suggest are required to be a successful
Apply Your Skills: Ethical Dilemma
Closing the Deal
1. Say nothing about the false numbers. Of course, the company will miss the
projections and have to come up with a good explanation, but after all, isn’t that
par for the course among fledgling high-tech companies? Chances are the whole
thing will blow over without a problem.
2. Go ahead and close the deal, but come clean later. Explain that the controller had
been on an extended leave of absence and, because you had been on the job only a
few days, you had not had time to personally do an analysis of the numbers.
3. Take swift action to notify the venture capitalists of the truth of the situation—
and start cleaning house to get rid of people who would knowingly lie to close a
deal.
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This is the only option there is to avoid potential legal issues later. Chuck Campbell should
Apply Your Skills: Case for Critical Analysis
Black-Jack Antiques
1. If you were Kevin how would you initiate a conversation with Jeremy? What would you
want to learn? What would you say?
If I were Kevin, I would initiate the conversation by asking about the problems faced by Jeremy
2. What does this case illustrate about the risks of starting a business with a partner? How
might those risks be minimized? Explain
This case illustrates the disadvantages of partnerships that include the unlimited liability of the
3. Do you think Kevin could make a go of the business alone? Should he try? Discuss.
On the Job Video Case Answers
Urban Escapes
1. Are Maia Josebachvili and Bram Levy entrepreneurs, social entrepreneurs, or both? Explain.
As individuals who initiated a business venture, organized resources, and assumed the risks and
rewards of their endeavor, Maia Josebachvili and Bram Levy are entrepreneurs. In particular,
improve society, not maximize profits.
2. Describe the personality traits of the Urban Escapes founders.
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Researchers have identified numerous personality traits that contribute to entrepreneurial
success. Josebachvili and Levy have an internal locus of control—they believe the future is in
3. How did the founders of Urban Escapes finance the company’s growth, and what options did
they have for additional funding?
Josebachvili and Levy state that Urban Escapes avoided many financial concerns because