Professional Documents
Culture Documents
Chapter 6 Bing
Chapter 6 Bing
Chapter 6 Bing
Ownership 6
LEARNING OBJECTIVES After studying this chapter, you will be able to
www.sistersky.com
For entrepreneurial inspiration, Monica Simeon didn’t have
to look far. She learned how to run a business by helping her
Image copyright © 2015 by Sister Sky. All rights reserved.
father operate one of the first Native American casinos. She got
the inspiration for her business while preparing batches of skin
lotions based on traditional herbal remedies after commercial
products didn’t help with her son’s severe eczema. And the
opportunity to form a business partnership was as close as her
sister, Marina TurningRobe.
Thus was born Sister Sky, which makes natural bath and
body products based on recipes and natural plant knowledge
handed down from generation to generation. The company
is based on the Spokane Indian Reservation in northeast
Washington state, where the sisters grew up—and grew into
their entrepreneurial lifestyle.
As with many other entrepreneurs, the sisters’ vision is
much broader than simply earning a living. They emphasize purity
Monica Simeon and Marina TurningRobe, the sisters behind Sister Sky and authenticity in their products, whether that means using
bath and body products, have turned their business dreams into reality more-expensive distilled water to avoid risks of contamination,
but still face some important challenges as they continue to grow. shunning the cheaper petroleum-based ingredients used in many
mass-produced bath and body products, or staying true to the
wisdom they have inherited from their ancestors. In addition, the
sisters believe they have a duty to “promote cultural sharing in
a positive way by educating consumers about the indigenous
essence and spirit of the plant botanicals contained in our
products.” Finally, Simeon says, “One of our main goals is to
improve the tribal economy by expanding opportunities for jobs
beyond the casino.”
167
168 PART TWO Building the Framework: Business Ownership and Entrepreneurship
If you were Simeon or TurningRobe, what steps would needed it? How would you stay true to your vision of authentic
you take to make sure your young business made it through and purposeful products while pursuing the goal of providing
the launch stage and onto a path of sustainable growth and job opportunities—and still meet the unrelenting demands of
profitability? Where might you turn for advice and support if you managing a business in a highly competitive industry?1
INTRODUCTION
Because you’re studying business, chances are you’ve already had an idea or two for a new
business. Are you ready to commit yourself fully to a business idea, as Monica Simeon and
Marina TurningRobe (profiled in the chapter-opening Behind the Scenes) have done? Are
you ready to make sacrifices and do whatever it takes to get your company off the ground?
Should you start something from scratch or buy an existing business? Being an entre-
preneur is one of the most exciting and important roles in business, but it requires high
energy and some tough decision making, as you’ll discover in this chapter.
As these selected statistics show, small businesses are a major force in employment, economic activity, and
global exports.
50–88
51%
35–49
33%
Non–veterans
91%
No employees
Small businesses,
Medium & big
14.3
33% of export value
businesses, 8.5
Source: Frequently Asked Questions: Advocacy the Voice of Small Business in Government, U.S. Small Business Administration,
March 2014, www.sba.gov.
170 PART TWO Building the Framework: Business Ownership and Entrepreneurship
They take risks that larger companies sometimes avoid. Entrepreneurs play a sig-
nificant role in the economy as risk takers—people willing to try new and unproven
ideas.
They provide specialized goods and services. Small businesses frequently spring
up to fill niches that aren’t being served by existing companies.
✓ Checkpoint
LEARNING OBJECTIVE 1: Highlight the contributions small businesses make
to the U.S. economy.
SUMMARY: Small businesses provide jobs, employing about half the private-sector
workforce. They introduce new and innovative products, they supply many of the
needs of larger organizations, they inject considerable amounts of money into the
economy, they often take risks that larger organizations avoid, and they provide many
specialized goods and services.
CRITICAL THINKING: (1) Why do you think many companies grow more risk averse as
they grow larger? (2) If they wanted to, could large businesses take the place of small
businesses in the U.S. economy? For instance, could someone build a nationwide
landscaping company? Why or why not?
IT’S YOUR BUSINESS: If you can’t land the right job soon after graduation, would you
consider starting a business? Why or why not?
2 LEARNING OBJECTIVE
The Entrepreneurial Spirit List the most common
To some people, working for themselves or starting a company seems a perfectly natural reasons people start their own
way to earn a living. To others, the thought of working outside the structure of a regular companies, and identify the
company might seem too scary to even contemplate. However, every professional should common traits of successful
understand the entrepreneurial spirit—the positive, forward-thinking desire to create entrepreneurs.
profitable, sustainable business enterprises—and the role it can play in every company, not entrepreneurial spirit
just small or new firms. The entrepreneurial spirit is vital to the health of the economy The positive, forward-thinking
and to everyone’s standard of living, and it can help even the largest and oldest companies desire to create profitable,
become profitable and competitive. sustainable business enterprises.
172 PART TWO Building the Framework: Business Ownership and Entrepreneurship
✓ Checkpoint
LEARNING OBJECTIVE 2: List the most common reasons people start
their own companies, and identify the common traits of successful
entrepreneurs.
Although no single personality profile fits all successful entrepreneurs, here are the qualities that entrepreneurs
tend to have.
Confidence
to
to to
to
to
Passion Drive
to
to
to
to
Sources: “Thinking About Starting a Business?,” U.S. Small Business Administration website, accessed 2 November 2013,
www.sba.gov; Kelly K. Spors, “So, You Want to Be an Entrepreneur,” Wall Street Journal, 23 February 2009, http://online
.wsj.com; Marshall Goldsmith, “Demonstrating the Entrepreneurial Spirit,” BusinessWeek, 26 August 2008, www.businessweek
.com; Sarah Pierce, “Spirit of the Entrepreneur,” Entrepreneur, 28 February 2008, www.entrepreneur.com; Norman
M. Scarborough and Thomas W. Zimmerer, Effective Small Business Management, 7th ed. (Upper Saddle River, N.J.:
Prentice Hall, 2003), 4.
new product ideas that they are deeply passionate about, pursuing business goals
that are important to them on a personal level, or seeking income alternatives
during tough employment markets. The entrepreneurial spirit, the positive, forward-
thinking desire to create profitable, sustainable business enterprises, is a good way to
summarize the entrepreneurial personality. Specifically, successful entrepreneurs tend
to love what they do and are driven by a passion to succeed at it, they are disciplined
and willing to work hard, they are confident and optimistic, and they like to control
their own destiny. Moreover, they relate well to others and have the ability to inspire
others, are curious, learn from their mistakes without letting failure drag them down,
are adaptable and tuned into their environments, and are moderate but careful risk
takers.
IT’S YOUR BUSINESS: (1) If you had to start a business right now and generate profit
as quickly as possible, what kind of business would you start? Explain your answer.
(2) How would you describe your level of entrepreneurial spirit?
Creating an all-new, independent business can be an exciting prospect, but this brief comparison highlights how much work it requires and how many
risks are involved. (You can read more about franchising on page 184.)
Possibilities
for Borrowing Customer
Start-Up Capital Owner’s Business Base, Brand
Start-Up Financial Outlay or Getting Freedom and Processes and Support Recognition, and
Strategy at Start-Up Investors Flexibility Systems Networks Workforce Sales
Create a new, Some businesses Usually very Very high, par- Must be Suppliers, bank- Must be hired None; must be built
independent can be started limited; most ticularly during designed and ers, and other and trained at from the ground
business with very little lenders and many early phases, created from elements of the the owner’s up, which can put
cash; others, investors want although low scratch, which network must expense serious strain on
particularly in evidence that capital can can be time- be selected; the company finances
manufacturing, the business can severely restrict consuming and good news is until sales volume
may require a lot generate revenue the owner’s abil- expensive that the owner builds
of capital before they’ll offer ity to maneuver can select and
funds; venture recruit ones that
capitalists invest he or she spe-
in new firms, cifically wants
but only in a few
industries
Buy an existing Can be Banks are more Less than when Already in place, Already in place; Already in Assuming that
independent considerable; willing to lend to creating a new which can be a may need to be place, which the business is at
business some companies “going concerns,” business be- plus or minus, upgraded could a positive least somewhat
sell for multiples and investors cause facilities, depending on or a negative, successful, it has
of their annual are more likely to workforce, and how well they but at least a customer base
revenue, for invest in them other assets work there are staff with ongoing sales
example are already in to operate the and some brand
place—more business reputation (which
than when buy- could be positive or
ing a franchise negative)
Buy into a Varies widely, Varies, but many Low to very low; One of the key Varies; some Must be hired Customer base and
franchise from a few thou- franchisors do not most franchi- advantages franchise com- and trained, repeat sales must
system sand to several allow franchisees sors require of buying a panies specify but a franchi- be built up, but one
hundred thousand to buy a franchise rigid adherence franchise is that which suppliers sor usually of the major advan-
dollars with borrowed to company it comes with a franchisee can provides train- tages of a franchise
funds, so they policies and an established use ing or training is established
must have their processes business system support brand recognition
own capital
C H AP T ER 6 Entrepreneurship and Small-Business Ownership 175
Compared to starting a new business, buying an existing business can involve less
work and less risk—provided, of course, that you check out the company carefully. When
you buy a healthy business, you generally purchase an established customer base, func-
tioning business systems, proven products or services, and a known location. In addition,
financing an existing business is often much easier because lenders are reassured by the
company’s history and existing assets and customer base.
Still, buying an existing business is not without disadvantages and risks. You may
need a considerable amount of financing to buy a fully functioning company, for example,
and you will inherit any problems the company has, from unhappy employees to obsolete
equipment to customers with overdue accounts. Thorough research is a must.15
The third option, buying a franchise (see page 184), combines many of the benefits of
independent business ownership with the support that comes with being part of a larger
organization.
Target market. Provide data that will persuade an investor that you understand your
target market. Be sure to identify the strengths and weaknesses of your competitors.
Marketing strategy. Provide projections of sales volume and market share; outline
a strategy for identifying and reaching potential customers, setting prices, providing
customer support, and physically delivering your products or services. Whenever
possible, include evidence of customer acceptance, such as advance product orders.
Design and development plans. If your products require design or development,
describe the nature and extent of what needs to be done, including costs and possible
problems.
Operations plan. Provide information on facilities, equipment, and personnel
requirements.
Start-up schedule. Forecast development of the company in terms of completion
dates for major aspects of the business plan.
Major risk factors. Identify all potentially negative factors and discuss them
honestly.
Financial projections and requirements. Include a detailed budget of start-up and
operating costs, as well as projections for income, expenses, and cash flow for the first
three years of business. Identify the company’s financing needs and potential sources.
Exit strategy. Explain how investors will be able to cash out or sell their investment,
such as through a public stock offering, sale of the company, or a buyback of the in-
vestors’ interest.
Veteran Silicon Valley entrepreneur and investor Guy
REAL - TIME UP DATES
Kawasaki advises entrepreneurs to create a concise executive
Learn More by Reading This PDF
summary of their business plan to use when presenting their
Want to pitch to investors? Learn from the ideas to investors for the first time. Entrepreneurs often
pros first have as little as 20 minutes (and sometimes even less) to
make these pitches, so a compelling presentation backed
Guy Kawasaki and his partners at Garage Technology Ventures up by an executive summary no longer than 20 pages is
offer invaluable advice on presenting a business idea to potential
ideal. The most important part of the entire package is “the
investors. Go to http://real-timeupdates.com/bia8 and click on
Learn More in the Students section.
grab,” a compelling one- or two-sentence statement that
gets an investor’s attention. If an investor is intrigued, he
or she can then read the executive summary to get a better
sense of the opportunity and then review the full business plan before making a deci-
sion to provide funds.18
Be aware that not all start-up veterans and investors believe in the value of a con-
ventional business plan, at least in a company’s early stages. Reasons for the skepticism
include the amount of time and energy required to research and write a plan, the reluc-
tance of many target readers to read such lengthy documents, the uncertainty of whether
a new product or company idea will even work, and the difficulty of correctly anticipating
all the circumstances and obstacles that a young company will encounter. Particularly
for companies that are developing new products or new business models before they can
launch, some experts recommend that entrepreneurs devote most of their energy to get-
ting a working product or service model in front of potential customers as quickly as pos-
sible so they can verify and fine-tune it before proceeding to extensive business planning.
Two popular alternatives to conventional business plans are high-level overviews known
as the Business Model Canvas and the Lean Canvas. They are essentially one-page business
plans that present only the essential ideas that make up an intended business model.19
✓ Checkpoint
LEARNING OBJECTIVE 3: Explain the importance of planning a new business,
and outline the key elements in a business plan.
SUMMARY: Planning is essential because it forces you to consider the best ownership
strategy for your needs and circumstances (creating a new company, buying an
existing company, or buying a franchise), and it forces you to think through the factors
C H AP T ER 6 Entrepreneurship and Small-Business Ownership 177
that will lead to success. An effective business plan should include your mission and
objectives, company overview, management, target market, marketing strategy,
design and development plans, operations plan, start-up schedule, major risk factors,
and financial projections and requirements.
CRITICAL THINKING: (1) Why is it important to identify critical risks and problems in
a business plan? (2) Many experts suggest that you write the business plan yourself,
rather than hiring a consultant to write it for you. Why is this a good idea?
IT’S YOUR BUSINESS: (1) Think of several of the most innovative or unusual products
you currently own or have recently used (don’t forget about services as well). Were
these products created by small companies or large ones? (2) Optimism and persever-
ance are two of the most important qualities for entrepreneurs. On a scale of 1 (lowest)
to 10 (highest), how would you rate yourself on these two qualities? How would your
best friend rate you?
These 12 blunders are among the most common reasons for the failure of new businesses.
Leadership Issues Marketing and Sales Issues Financial Issues Systems and Facilities Issues
Managerial incompetence: Ineffective marketing: Small Inadequate financing: Being Poor location: Being in the wrong
Owner doesn’t know how to plan, companies—especially new small undercapitalized can prevent a place will doom a retail operation
lead, control, or organize. companies—face a tremendous company from building the scale and can raise costs for other types
Lack of strategic planning: challenge getting recognition in required to be successful or of business as well.
Owner didn’t think through all the crowded markets. sustaining operations until sales Poor inventory control: Company
variables needed to craft a viable Uncontrolled growth: Company revenues increase enough for the may produce or buy too much
business strategy. may add customers faster than it firm to be self-funding. inventory, raising costs too high—
Lack of relevant experience: can handle them, leading to chaos, Poor cash management: A or it may do the opposite and be
Owner may be experienced in or may even “grow its way into company may spend too much unable to satisfy demand.
business but not in the particular bankruptcy” if it spends wildly to on nonessentials, fail to balance
markets or technologies that are capture and support customers. expenditures with incoming
vital to the new firm’s success. Overreliance on a single revenues, fail to use loan or
customer: One huge customer investment funds wisely, or fail to
Inability to make the transition
can disappear overnight, leaving budget enough to pay its bills.
from corporate employee
to entrepreneur: Owner can’t the company in dire straits. Too much overhead: Company
juggle the multiple and diverse creates too many fixed expenses
responsibilities or survive the lack that aren’t directly related to
of support that comes with going creating or selling products, leaving
solo. it vulnerable to any slowdown in the
economy.
Sources: Brian Hamilton, “The 7 Biggest Financial Mistakes Businesses Make,” Inc., 9 August 2011, www.inc.com; Norman M. Scarborough and Thomas W. Zimmerer,
Effective Small Business Management, 7th ed. (Upper Saddle River, N.J.: Prentice Hall, 2003), 27–29.
Another study—this one a comprehensive analysis using data from the U.S. Census
Bureau—found that 50 percent of all new employer firms (those that hire employees)
were still in business after four years, and another 17 percent were no longer in operation
but had closed “successfully,” meaning that the owner retired, sold the company, or other-
wise ended the enterprise on a positive note. In other words, averaged across all industries,
only 33 percent actually “failed” during this time frame.22
Although the statistics may not be quite as gloomy as many people think, even a
33 percent failure rate should demand the careful entrepreneur’s attention. To help make
sure you don’t become a statistic, start by understanding why businesses tend to fail (see
Exhibit 6.4) and figure out how to avoid making the same mistakes.
Perhaps one of the most important reasons companies fail is something that doesn’t
always show up in surveys. It’s a simple matter of “motivational collapse,” when the
would-be entrepreneur encounters one too many setbacks and simply doesn’t have
the drive to keep going.23 A truly committed entrepreneur, in contrast, keeps pushing
onward, experimenting, making adjustments, and keeping his or her enthusiasm level
high until things start to click. One would be hard-pressed to improve on the insight and
advice offered by Marina TurningRobe of Sister Sky: “In business, you must have the cour-
age and honesty to admit when you fall short. This helps you refine, reformulate, redesign
and come back stronger and better. If you can’t admit your shortcomings you will become
stagnant, irrelevant, or just plain arrogant. In a competitive business environment, being
any of these will be your demise.”24
economic development chartered with helping companies prosper so that they might contrib-
ute to the local or regional economy. At the federal level, small businesses can apply for loans
backed by the Small Business Administration (SBA), get management and financing advice,
and learn about selling to the federal government at www.sba.gov. The Minority Business
Development Agency (www.mbda.gov) offers advice and programs to minority-owned
businesses. Many state agencies also have offices to help small firms compete.
Some of the best advice available to small businesses is delivered by thousands of vol-
unteers from the Service Corps of Retired Executives (SCORE), a resource partner of the
SBA. These experienced business professionals offer free advice and one-to-one counsel-
ing to entrepreneurs. You can learn more at www.score.org.
Many colleges and universities also offer entrepreneurship and small-business programs.
Check with your college’s business school to see whether resources are available to help you
launch or expand a company. The U.S. Chamber of Commerce (www.uschamber.com) and
its many local chambers offer advice and special programs for small businesses as well.
Business Partners
Banks, credit card companies, software companies, and other firms you do business
with can also be a source of advice and support. For example, the Open Forum, hosted
by American Express, offers a variety of videos, articles, and online network tools to help
small-business owners, as well as online tutorials and forums where business owners can
post questions.25 As you might expect, the free resources from these companies are part
of their marketing strategies and so include a certain amount of self-promotion, but don’t
let that stop you from taking advantage of all the free advice you can get.
Here are just a few of the many online networks that provide advice and vital connections for entrepreneurs.
Some of these are not specific to small business, but they’ve become major resources for business owners.
Some also feature public and private groups that focus on specific business issues.
country have local networks; search online for “entrepreneur network.” Some entrepre-
neurs meet regularly in small groups to analyze each other’s progress month by month.
Being forced to articulate your plans and decisions to peers—and to be held accountable
for results—can be an invaluable reality check. Some groups focus on helping entre-
preneurs hone their presentations to potential investors. In addition to local in-person
groups, social networking technology gives entrepreneurs an endless array of opportuni-
ties to connect online (see Exhibit 6.5).
Business Incubators
business incubators Business incubators are centers that provide “newborn” businesses with various combi-
Facilities that house small nations of advice, financial support, access to industry insiders and connections, facilities,
businesses and provide support and other services a company needs to get started. Some incubators are not-for-profit
services during the company’s organizations affiliated with the economic development agencies of local or state govern-
early growth phases. ments or universities, some are for-profit enterprises, some are run by venture capitalists,
and some companies have internal incubators to encourage new ventures.
One of the best-known incubators, Y Combinator
(http://ycombinator.com), has helped to fund and nur-
REAL - TIME UP DATES ture hundreds of companies in digital media and related
Learn More by Visiting This Website industries. In exchange for a small share of ownership, it
makes small investments in companies; more important, it
Find an incubator to nurture your new
helps founders refine their ideas, develop products, polish
venture
their pitches to investors, connect with industry experts,
The National Business Incubation Association has information about handle incorporation issues to avoid legal trouble later on,
incubators and links to one in your area. Go to http://real-time hire the right kind of employees, and even mediate disputes
updates.com/bia8 and click on Learn More in the Students section. between company founders. If all this help sounds priceless,
Y Combinator would certainly agree with you: “The kind of
C H AP T ER 6 Entrepreneurship and Small-Business Ownership 181
advice we give literally can’t be bought, because anyone qualified to give it is already rich.
You can only get it from investors.”27
✓ Checkpoint
LEARNING OBJECTIVE 4: Identify the major causes of business failures,
and identify sources of advice and support for struggling business owners.
CRITICAL THINKING: (1) Why would a state or local government invest taxpayer
dollars in a business incubator? (2) Can you think of any risks of getting advice from
other entrepreneurs?
IT’S YOUR BUSINESS: (1) Have you ever shopped at a store or eaten in a restaurant
and said to yourself, “This place isn’t going to make it”? What factors caused you
to reach that conclusion? (2) Does your college have an entrepreneur program or
participate in a business incubator? If you wanted to start a business, how might such
services help you?
Figuring out how much you’ll need in order to start a business requires good insights into Discuss the principal sources of
the particular industry you plan to enter. Figuring out where to get the money is a creative small-business private financing.
challenge no matter which industry you’re in. Financing a business enterprise is a complex
undertaking, and chances are you’ll need to piece together funds from multiple sources,
possibly using a combination of equity (in which you give investors a share of the business
in exchange for their money) and debt (in which you borrow money that must be repaid).
You’ll read more about equity and debt financing in Chapter 18. Exhibit 6.6 on the next
page identifies, in broad terms, the major types of financing available to businesses at
various stages in their life cycle.
PRIVATE FINANCING
Private financing covers every source of funding except selling stocks and bonds. Nearly
all companies start with private financing, even those that eventually “go public.” The
range of private financing options is diverse, from personal savings to investment funds
set up by large corporations looking for entrepreneurial innovations. Many firms get seed seed money
money, their first infusion of capital, through family loans. If you go this route, be sure to The first infusion of capital used
make the process as formal as a bank loan would be, complete with a specified repayment to get a business started.
plan. Otherwise, problems with the loan can cause problems in the family.28
Four common categories of private financing are banks and microlenders, venture
capitalists, angel investors, and personal credit cards and lines of credit.
Banks and Microlenders
Bank loans are one of the most important sources of financing for small business, but
there’s an important catch: In most cases, banks won’t lend money to a start-up that hasn’t
182 PART TWO Building the Framework: Business Ownership and Entrepreneurship
The potential funding sources available to a business owner vary widely, depending on where the business is
in its life cycle. Note that this is a general map and covers only the most common funding sources. Individual
lending opportunities depend on the specific business owner(s), the state of the economy, and the type of
business and its potential for growth. For example, venture capital is available only to firms with the potential
to grow rapidly and only in a few industries.
Sales
Venture capital
Angel investments
Microloans
Crowdfunding
Personal funds
Credit cards
Private loans
Time
established a successful track record.29 As your company grows, a bank will usually be
a good long-term partner, helping you finance expansions and other major expenses.
However, just about your only chance of getting a bank loan is by putting up marketable
collateral, such as buildings or equipment, to back the loan.30
In response to the needs of entrepreneurs who don’t qualify for standard bank loans
or who don’t need the amount of a regular loan, hundreds of organizations now serve as
microlenders microlenders, offering loans up to $35,000 or so. You can learn more at the Association
Organizations, often not-for- for Enterprise Opportunity website, at www.microenterpriseworks.org.31
profit, that lend smaller amounts
of money to business owners who Venture Capitalists
might not qualify for conventional At the other end of the funding scale are venture capitalists (VCs), investment specialists
bank loans.
who raise pools of capital from large private and institutional sources (such as pension
funds) to finance ventures that have high growth potential and need large amounts of cap-
venture capitalists (VCs) ital. VC funding provides a crucial stimulus to the economy by making risky, early-stage
Investors who provide money investments in firms that are likely to become major employers if their products succeed
to finance new businesses or in the marketplace. Because one-third of VC-funded start-ups don’t succeed, those that
turnarounds in exchange for a do succeed need to really pay off to compensate. VCs are therefore extremely focused and
portion of ownership, with the
selective; they invest in only a few thousand companies in the United States every year.32
objective of reselling the business
Given the amounts of money involved and the expectations of sizable returns, VCs
at a profit.
usually invest in high-potential areas such as information technology, energy, biotechnol-
ogy, and digital media. Unlike banks or most other financing sources, VCs do more than
simply provide money. They also provide management expertise in return for a sizable
ownership interest in the business. Once the business becomes profitable, VCs reap the
reward by selling their interest to long-term investors, usually after the company goes
angel investors
public.
Private individuals who invest
Angel Investors
money in start-ups, usually earlier
in a business’s life and in smaller Start-up companies that can’t attract VC investment (perhaps because they are too early in
amounts than VCs are willing to their product development) often look for angel investors, private individuals who put
invest or banks are willing to lend. their own money into start-ups, with the goal of eventually selling their interest for a profit.
C H AP T ER 6 Entrepreneurship and Small-Business Ownership 183
These individuals are willing to invest smaller amounts than R EAL -T IME UPD AT E S
VCs and often stay involved with the company for a longer Learn More by Reading This Article
period of time. Many of these investors join angel networks or
angel groups that invest together in chosen companies. Angel Looking for an angel?
investing tends to have a more local focus than venture capi- Find angel investors through the Angel Capital Association. Go to
talism, so you can search for angels through local business http://real-timeupdates.com/bia8 and click on Learn More in the
contacts and organizations. Students section.
PUBLIC FINANCING
Companies with solid growth potential may also seek funding from the public at large,
although only a small fraction of the companies in the United States are publicly traded.
Whenever a corporation offers its shares of ownership to the public for the first time, the
company is said to be going public. The shares offered for sale at this point are the compa-
ny’s initial public offering (IPO). Going public is an effective method of raising needed initial public offering (IPO)
capital, but it can be an expensive and time-consuming process with no guarantee of A corporation’s first offering of
raising the amount of money needed. Public companies must meet a variety of regulatory shares to the public.
requirements, as you’ll explore in more detail in Chapter 18.
CROWDFUNDING
Crowdfunding is an intriguing twist to funding that combines elements of public and crowdfunding
private financing. Kickstarter is perhaps the best known of these web services that provide Soliciting project funds, business
a way for people and organizations to seek money from the public. Crowdfunding services investment, or business loans
fall into two general categories. Kickstarter and a number of other sites focus on individual from members of the public.
projects or charitable endeavors, and people provide money in exchange for the product
being created or simply to help people and causes they believe in. In contrast, services such
as Crowdfunder (www.crowdfunder.com) and Indiegogo (www.indiegogo.com) help
business owners raise money to launch or expand companies, and the people who provide
money are investing in or lending to the company. Government regulations regarding
investment crowdfunding are still being finalized, but these services have the potential to
give entrepreneurs some potent new ways to get their companies off the ground.36
184 PART TWO Building the Framework: Business Ownership and Entrepreneurship
✓ Checkpoint
LEARNING OBJECTIVE 5: Discuss the principal sources of small-business
private financing.
SUMMARY: Sources of private financing for small businesses include banks and
microlenders, venture capitalists, angel investors, credit cards and personal lines of
credit, and loan programs from the Small Business Administration. Companies that
reach sufficient size with continued growth potential have the additional option of
seeking public financing by selling shares.
CRITICAL THINKING: (1) Would a profitable small business with only moderate growth
potential be a good candidate for venture capitalist funding? Why or why not? (2) Why
would angel investors help finance companies privately, rather than buying shares of
publicly traded companies?
IT’S YOUR BUSINESS: (1) Would you be willing to take on credit card debt in order to
start a company? Why or why not? (2) What would it take to convince you to invest in
or contribute to a crowdsourced startup?
KEY TERMS TO KNOW: seed money, microlenders, venture capitalists (VCs), angel
investors, initial public offering (IPO), crowdfunding
DISADVANTAGES OF FRANCHISING
Although franchising offers many advantages, it is not the ideal
vehicle for everyone. Perhaps the biggest disadvantage is the
relative lack of control, at several levels. First, when you buy into
a franchise system, you typically agree to follow the business
format, and franchisors can prescribe virtually every aspect of
the business, from the color of the walls to the products you
can carry. In fact, if your primary purpose in owning a business
is the freedom to be your own boss, franchising probably isn’t Buying a new or existing franchise is an attractive alternative for many
the best choice because you don’t have a great deal of freedom people who want some of the freedoms of entrepreneurship without
in many systems. Second, as a franchisee, you usually have little all the risks.
control over decisions the franchisor makes that affect the entire
system. Disagreements and even lawsuits have erupted in
recent years over actions taken by franchisors regarding R EAL -T IME UPD AT E S
product supplies, advertising, and pricing.38 Third, if the Learn More by Reading This PDF
fundamental business model of the franchise system no
longer works—or never worked well in the first place—or Don’t sign that franchise agreement before
if customer demand for the goods and services you sell you read this
declines, you don’t have the option of independently changing Before you commit to a franchise, consult “Buying a Franchise:
your business in response. A Consumer Guide,” a free publication from the FTC. Go to
In addition, buying a franchise involves both initial costs http://real-timeupdates.com/bia8 and click on Learn More in the
associated with buying into a franchise system and regular Students section.
payments after that, based on a percentage of sales revenue.
These costs vary widely, based on the complexity and popu-
larity of the franchise. Many systems require a minimum
level of liquid assets (spendable cash, essentially) and personal net worth, in addition to
the out-of-pocket costs you’ll have. The start-up costs for a simple home-based franchise
can be less than $10,000, but a popular fast-food franchise can run from $250,000 to
$2 million, and luxury hotels can top $5 million. Most franchises, however, have initial
costs in the $50,000 to $200,000 range.39
✓ Checkpoint
LEARNING OBJECTIVE 6: Explain the advantages and disadvantages of
franchising.
A franchise agreement is a legally binding contract that defines the relationship between a franchisee and a
franchisor. Before signing a franchise agreement, be sure to read the disclosure document and consult an
attorney.
1. What are the total start-up costs? What does the initial franchise fee cover? Does it include a starting
inventory of supplies and products?
2. Who pays for employee training?
3. How are the periodic royalties calculated, and when must they be paid?
4. Who provides and pays for advertising and promotional items? Do you have to contribute to an
advertising fund?
5. Are all trademarks and names legally protected?
6. Who selects or approves the location of the business?
7. Are you restricted to selling certain goods and services?
8. Are you allowed to sell online?
9. How much control will you have over the daily operation of the business?
10. Is the franchise assigned an exclusive territory?
11. If the territory is not exclusive, does the franchisee have the right of first refusal on additional franchises
established in nearby locations?
12. Is the franchisee required to purchase equipment and supplies from the franchisor or other suppliers?
13. Under what conditions can the franchisor or the franchisee terminate the franchise agreement?
14. Can the franchise be assigned to heirs?
Source: “Buying a Franchise: A Consumer Guide,” U.S. Federal Trade Commission website, accessed 31 March 31, 2015,
www.ftc.gov.
because you have some evidence that the business model works. The primary disad-
vantages are the lack of control and the costs, both the initial start-up costs and the
monthly payments based on a percentage of sales.
CRITICAL THINKING: (1) Why might a business owner with a successful concept
decide to sell franchises rather than expand the company under his or her own
control? (2) Why might someone with strong entrepreneurial spirit be dissatisfied with
franchise ownership?
IT’S YOUR BUSINESS: (1) Are you a good candidate for owning and operating a
franchise? Why or not? (2) Think about a small-business idea you’ve had or one of the
small businesses you patronize frequently. Could this business be expanded into a
national or international chain? Why or why not?
Sisters Monica Simeon and Marina TurningRobe have commit- After Simeon and TurningRobe decided to turn their first
ted themselves to making products that are both authentic and homemade lotions into a real business, they started in a leased
purposeful and in doing so have created a company that shares manufacturing space in Spokane, Washington. Both of their
those same attributes. Of course, like just about every other families would pitch in for 12-hour days, seven days a week—
small business, Sister Sky has required intense dedication and mixing, bottling, and boxing. When sales began to take off, they
many, many long days. built their own manufacturing facility on the Spokane Indian
C H AP T ER 6 Entrepreneurship and Small-Business Ownership 187
Reservation, as part of their commitment to help reservation Enterprise (MBE) certification from the National Minority Supplier
economies diversify beyond gaming. Putting their houses up for Development Council, the company has made its first inroads
collateral, they installed a $100,000 automated manufacturing into having its products used by Wyndham and other major hotel
system to replace much of the manual labor and expand their and resort chains. Sister Sky’s MBE status helps these large
production volume. Beyond employing and mentoring fellow customers meet supplier diversity goals.
tribal members, including offering job-readiness training for tribal After more than a decade into their entrepreneurial
youth, the sisters also made a point of buying goods and ser- adventure, the sisters and their company are going strong with
vices from other Native American–owned companies and serving expanding sales but also with rewards that go beyond their own
as entrepreneurial role models in Native American communities. business objectives. By employing fellow tribe members and
In addition to scaling up manufacturing, Simeon and offering both inspiration and practical training, TurningRobe and
TurningRobe had to adjust their original marketing strategy. They Simeon are fulfilling their larger purpose, too. “Wealth building
initially focused on the general gift market but found that they in our tribal communities through entrepreneurship is critical
were a tiny player in a vast market. Realizing that the cultural if we are going to improve our conditions and solve our own
heritage of their product line gave them a unique advantage, they problems,” Simeon explains. TurningRobe also speaks for many
refocused on hotels and resorts, particularly those with luxury passionate entrepreneurs when she says, “If you love what you
spa services. They also now offer spa consulting services, help- do and strive to create meaning to what you sell or create, and
ing property owners create culturally authentic environments and do it on a professional level, then I think you have found your
experiences for their guests. purpose.”41
As is often the case, the challenges don’t stop as a busi-
ness grows, and Simeon and TurningRobe faced several classic Critical Thinking Questions
small-business dilemmas, including time management. Simeon’s 6-1. Which of the qualities of successful entrepreneurs have
husband joined the company as production manager, which Simeon and TurningRobe demonstrated?
freed up the sisters’ time for selling, but as Simeon said recently, 6-2. Should Simeon and TurningRobe consider lowering their
“We’re so busy selling, we have no time to step back and strat- ingredient costs by switching to petroleum-based ingredi-
egize.” A consultant who worked with them during a “business ents or stopping their use of pure distilled water? Why or
makeover” sponsored by Fortune Small Business magazine why not?
stressed that they really have no choice on this: They simply have 6-3. Would opening their own retail stores be a risky decision
to make time for strategizing, forcing themselves to step away for Sister Sky? How would this change the company’s
from marketing and sales activities every quarter to review and business model?
adjust their business plan.
One of the key strategic decisions Simeon and TurningRobe LEARN MORE ONLINE
must make is where to expand next. They’ve already moved Explore the Sister Sky website at www.sistersky.com and
beyond spa sales to high-end boutiques and gift shops, where find the company on Facebook and Twitter. How well does the
their unique product concept appeals to consumers looking for company’s online presence reflect its values? Does the informa-
something out of the ordinary. Being active in social media is tion you find encourage you to learn more about the company’s
helping them make connections with customers and potential products? How could all entrepreneurs, regardless of market
business partners, too. Also, having received Minority Business niche or company style, learn from Sister Sky’s online presence?
KEY TERMS
advisory board (179) franchisor (184)
angel investors (182) initial public offering (IPO) (183)
business incubators (180) microlenders (182)
business plan (175) seed money (181)
crowdfunding (183) small business (168)
entrepreneurial spirit (171) venture capitalists (VCs) (182)
franchise (184)
franchisee (184)
MyBizLab®
To complete the problems with the ,
go to EOC Discussion Questions in the
MyLab.
188 PART TWO Building the Framework: Business Ownership and Entrepreneurship
MyBizLab®
Go to the Assignments section of your MyLab to complete these writing exercises.
6-24. Given the risks involved in starting any company, should an aspiring entre-
preneur investigate all possible failure scenarios and develop action plans to
avoid these potential outcomes? Explain your answer.
6-25. Is “I don’t like having a boss tell me what to do” a good reason to start your
own company? Explain your answer.
ENDNOTES
1. Sister Sky website, accessed 28 March 2015, www.sistersky of Small Business Size Standards Matched to North American
.com; Sister Sky Facebook page, accessed 28 March 2015, www Industry Classification System Codes,” U.S. Small Business
.facebook.com/pages/Sister-Sky/230340194280; “MBDA Helps Administration, effective 14 July 2014, www.sba.gov.
Sister Sky Tap into a Legacy of Entrepreneurism,” MBDA.gov 4. “How Important Are Small Businesses to the U.S. Economy?”
Newsletter, March 2011, U.S. Department of Commerce Minority U.S. Small Business Administration, accessed 30 March
Business Development Agency, accessed 8 August 2011, www 2009, www.sba.gov; Malik Singleton, “Same Markets, New
.mbda.gov; Patricia Gray, “Conditioning a Firm for Growth,” Marketplaces,” Black Enterprise, September 2004, 34; Edmund L.
Fortune Small Business, 3 December 2007; “Necessity Inspires This Andrews, “Where Do the Jobs Come From?” New York Times,
Mother’s Invention: New Body Lotion Is Nature-Based Eczema 21 September 2004, E1, E11.
Treatment,” press release, 2 July 2007, www.theproductrocket 5. U.S. Small Business Administration, Frequently Asked Questions:
.com; A. J. Naff, “Sister Sky: A Perfect Blend of Entrepreneurship Advocacy the Voice of Small Business in Government, September 2012.
and Native Wisdom,” Indian Gaming, June 2008, 32–33. 6. Frequently Asked Questions: Advocacy the Voice of Small Business in
2. Bernard Stamler, “Redefinition of Small Leads to a Huge Brawl,” Government.
New York Times, 21 September 2004, G8. 7. “About Etsy,” Etsy, accessed 11 August 2011, www.etsy.com.
3. “Small Business Size Standards,” U.S. Small Business 8. College Nannies & Tutors, accessed 2 November 2013, www
Administration, accessed 31 March 2015, www.sba.gov; “Table .collegenanniesandtutors.com; Stacy Perman, “The Startup Bug
190 PART TWO Building the Framework: Business Ownership and Entrepreneurship
Strikes Earlier,” BusinessWeek, 31 October 2005, www.business 26. Christine Comaford-Lynch, “Don’t Go It Alone: Create an
week.com. Advisory Board,” BusinessWeek, 1 February 2007, www.business
9. Jim Hopkins, “Bad Times Spawn Great Start-Ups,” USA Today, week.com.
18 December 2001, 1B; Alan Cohen, “Your Next Business,” FSB, 27. “About Y Combinator,” Y Combinator, accessed 31 March 2015,
February 2002, 33–40. http://ycombinator.com.
10. Matt Richtel and Jenna Wortham, “Weary of Looking for Work, 28. Paulette Thomas, “It’s All Relative,” Wall Street Journal, 29 November
Some Create Their Own,” New York Times, 13 March 2009, www 2004, R4, R8.
.nytimes.com. 29. Reed Albergotti, “Long Shot,” Wall Street Journal, 29 November
11. Heather Green, “Self-Help for Startups,” BusinessWeek, 5 February 2004, R4; Norman Scarborough and Thomas Zimmerer, Effective
2009, www.businessweek.com. Small Business Management (Upper Saddle River, N.J.: Pearson
12. Richtel and Wortham, “Weary of Looking for Work, Some Create Prentice Hall, 2002), 439.
Their Own.” 30. Bob Zider, “How Venture Capital Works,” Harvard Business Review,
13. Intrapreneur, accessed 31 March 2009, www.intrapreneur.com. November/December 1998, 131–139.
14. Jeffrey Bussgang, “Think Like a VC, Act Like an Entrepreneur,” 31. Association for Enterprise Opportunity website, accessed 11 August
BusinessWeek, 14 August 2008, www.businessweek.com. 2011, www.microenterpriseworks.org.
15. “Buy a Business,” U.S. Small Business Administration, accessed 32. National Venture Capital Association website, accessed 11 August
3 July 2007, www.sba.gov. 2011, www.nvca.org.
16. Joshua Hyatt, “The Real Secrets of Entrepreneurs,” Fortune, 33. David Port, “APR Hikes Ambush Biz Owners,” Entrepreneur,
15 November 2004, 185–202. 16 March 2009, www.entrepreneur.com; Bobbie Gossage,
17. Heidi Brown, “How to Write a Winning Business Plan,” Forbes, “Charging Ahead,” Inc., January 2004, www.inc.com.
18 June 2010, www.forbes.com; Michael Gerber, “The Business 34. U.S. Small Business Administration website, accessed 11 August
Plan That Always Works,” Her Business, May/June 2004, 23–25; 2011, www.sba.gov.
J. Tol Broome, Jr., “How to Write a Business Plan,” Nation’s Business, 35. U.S. Small Business Administration website, accessed 11 August
February 1993, 29–30; Albert Richards, “The Ernst & Young 2011, www.sba.gov.
Business Plan Guide,” R & D Management, April 1995, 253; David 36. SoMoLend website, accessed 3 November 2013, www.somolend
Lanchner, “How Chitchat Became a Valuable Business Plan,” Global .com; Crowdfunder website, accessed 3 November 2013,
Finance, February 1995, 54–56; Marguerita Ashby-Berger, “My http://crowdfunder.com; Steven M. Davidoff, “Trepidation and
Business Plan—And What Really Happened,” Small Business Forum, Restrictions Leave Crowdfunding Rules Weak,” New York Times,
Winter 1994–1995, 24–35; Stanley R. Rich and David E. Gumpert, 29 October 2013, www.nytimes.com; Chance Barnettt, “Top 10
Business Plans That Win $$$ (New York: Harper & Row, 1985). Crowdfunding Sites for Fundraising,” Forbes, 8 May 2013, www
18. “Writing a Compelling Executive Summary,” Garage Technology .forbes.com.
Ventures, accessed 9 March 2011, www.garage.com; “Crafting 37. U.S. Census Bureau, “Census Bureau’s First Release of
Your Wow! Statement,” Garage Technology Ventures, accessed Comprehensive Franchise Data Shows Franchises Make Up More
9 March 2011, www.garage.com; Guy Kawasaki website, accessed Than 10 Percent of Employer Businesses,” 14 September 2010,
9 March 2011, www.guykawasaki.com. www.census.gov.
19. Strategyzer website, accessed 1 March 2015, www.business 38. Douglas MacMillan, “Franchise Owners Go to Court,” BusinessWeek,
modelgeneration.com; Ash Maurya, “Why Lean Canvas vs 29 January 2007, www.businessweek.com; Jill Lerner, “UPS Store
Business Model Canvas?” Practice Trumps Theory blog, 27 Dispute Escalating,” Atlanta Business Chronicle, 24 February 2006,
February 2012, http://practicetrumpstheory.com www.bizjournals.com.
20. Rebecca L. Weber, “The Travel Agent Is Dying, But It’s Not Yet 39. Eddy Goldberg, “The Costs Involved in Opening a Franchise,”
Dead,” CNN, 10 October 2013, www.cnn.com. Franchising.com, accessed 31 March 2015, www.franchising
21. Kerry Miller, “The Restaurant-Failure Myth,” BusinessWeek, 16 April .com; “U.S. Franchising,” McDonald’s website, accessed 31 March
2007, 19. 2015, www.aboutmcdonalds.com; Hayley Peterson, “Here’s How
22. Brian Headd, “Redefining Business Success: Distinguishing Between Much It Costs to Open Different Fast Food Franchises in the
Closure and Failure,” Small Business Economics 21, 51–61, 2003. U.S.,” Business Insider, 4 November 2014. www.businessinsider
23. Joel Spolsky, “Start-Up Static,” Inc., March 2009, 33–34. .com.
24. “MBDA Helps Sister Sky Tap into a Legacy of Entrepreneurism.” 40. Buying a Franchise: A Consumer Guide, U.S. Federal Trade Com-
25. OPEN Forum, accessed 2 November 2013, https://www.open mission, accessed 12 August 2011, www.ftc.gov.
forum.com/explore/. 41. See Note 1.