Archive for February, 2012
I had a conversation with a friend of mine the other day about what sets apart a person who wants to start a new business. My friend told a story about someone who wanted to start a new business, but did not know where to turn to formalize a business plan. This person went to one of the big accounting firms in town just to get some ideas. The firm prepared a beautiful business plan and handed him a $20,000 bill for its services.
This business founder read the plan and did not understand a word of it. Frustrated, this person went back to my friend and asked him what he should do. My friend advised him not to pay the bill. My friend said if the business founder could not understand the plan it has no value. Why pay for a business plan having little or no value?
The moral of the story is if you want to build a business plan one of the most important steps you need to take is to internalize it. If you do not own the plan what value is it? Successful business founders must live and die by the plans they create. The founder must understand the plan like the back of his or her hand. If not, the plan has little value.
I encourage people to do their own research before embarking on a new venture. Certainly, I can help lead a person in the right direction, but at the end of the day the business plan belongs to the founder. How many times have you seen someone who cannot express their plan in an elevator pitch? Chances are such people have not internalized their plans. Learn more.
Studies have shown entrepreneurs improve their chances of success with education (Blanchflower, 2004). Education for a business entrepreneur though is different from traditional educational programs focusing on learning business skills.
Business skills are necessary, but small business founders also have unique needs. These needs include gaining expertise, cultivating entrepreneurial drive, advancing the ability to promote change, developing the right talent, encouraging competitive drive, and dealing with risk in uncertain conditions (Lewrick, Omar, Raeside, & Sailer, 2011). Many of these needs entrepreneurs gain from experience and not the classroom.
The major role of a small business entrepreneur is to find and take advantage of opportunities. Founders do not want to lose opportunities and put opportunity development first before learning business skills. The small business founder learns best in an experiential learning setting (Heinonen & Poikkijoki, 2006).
Founders of small business learn best from experienced entrepreneurs in an active setting instead of sitting in a classroom learning business planning skills. An active setting allows the entrepreneur to gain business skills, while developing business opportunities and stimulating innovation. Learn more.
Blanchflower, D. G. (2004). Self-Employment: More may not be better. (10286). National Bureau of Economic Research. Retrieved from http://www.nber.org/papers/w10286.
Heinonen, J., & Poikkijoki, S. (2006). An entrepreneurial-directed approach to entrepreneurship education: mission impossible? Journal of Management Development, 25(1), 80-94.
Lewrick, M., Omar, M., Raeside, R., & Sailer, K. (2011). Education for entrepreneurship and innovation: “Management capabilities for sustainable growth and success”. World Journal of Entrepreneurship, Management and Sustainable Development, 6(1), 1-18. doi: 10.1108/20425961201000001
Business founders often form a small business from a new idea to serve a niche in the market. Small businesses play a major role identifying gaps in the market and take advantage of them (Soros, 1998). In the new global world marketplace this role is especially important to serve social needs not addressed by massive multinational companies. No one is closer to the consumer than small business. The consumer may have needs unmet social and product needs.
The entrepreneur should have a deep-seated interest in solving these needs that go unmet because supply-side economic principles used by multinational corporations often fail to deal with them. Multinational corporations simply raise prices because oligopolistic or monopolistic conditions exist. Small businesses rely more on supply and demand equilibrium to bring products and services to market.
Small businesses are more nimble and can respond to gaps in the market. Entrepreneurs founding new ventures put together flatter business concerns more aligned with rising consumer needs. Small business founders deal with unclear business conditions trying ideas to solve these budding needs. Multinational corporations are more adept at dealing with managing existing risk through risk management tactics designed to preserve wealth. Entrepreneurs drive wealth creation by understanding consumer needs and dealing with unknown conditions.
Hormozi (2004) reported that according to the Small Business Administration (SBA), new business drive economic growth and provide most of the new jobs. The SBA defines small businesses as having fewer than 500 employees and less than $50 million in revenue excluding farm businesses.
Certain characteristics fuel entrepreneurs to lead small business. A need to achieve propels entrepreneurs to triumph over unknown conditions and solve unmet needs. Hard work is a ritual to the dedicated entrepreneur, and an orientation to quality motivates the entrepreneur to nurture a new venture to success. The business founder accepts total responsibility for the success or failure the business achieves. Entrepreneurs recognize accomplishments with rewards. Business founders view opportunities in a positive light and believe anything is possible. Entrepreneurs take pride in finding excellence in achieving their goals. These people take responsibility for bringing together the right group of people aiding the company to achieve its goals. Profit motivates the business founder to a lesser extent, but serves as a benchmark toward achieving success (Hormozi, 2004).
Do you have what it takes? Learn more.
Hormozi, A. M. (2004). Becoming an entrepreneur: How to start a small business. International Journal of Management, 21(3), 278-285. doi: 784446471; 14557301; 11864; MJI; INODMJI0001483700
Soros, G. (1998). Toward a global open society. The Atlantic Online, 281(1), 20-32. Retrieved from http://www.theatlantic.com/past/docs/issues/98jan/opensoc.htm
Many times a person wanting to start a business has no idea what risks to focus on when founding a new business venture. Each small business is different and each business founder has different experiences about what is truly important. Experience in dealing with risk helps the small business founder because he or she has some idea of what to expect. Larger firms have similar difficulty dealing with risks.
Experience is the single biggest quality a person can have to deal with risk effectively. Small business founders deal with risk most effectively as needed when it comes up. Unlike larger firms engaging in extensive planning, experience helps the small business entrepreneur effectively work through risks envisaged as important at a particular time.
Small business entrepreneurs expose themselves to uncertain conditions for which risk does not surface until trying to face these conditions. Milliken (1987) defined uncertainty, ”… as an individual’s inability to predict something accurately” (p. 136). Miliken distinguished uncertainty from risk by stating, unlike risk, an entrepreneur cannot plan for uncertain conditions.
McKelvie, Haynie, and Gustavsson (2009) explained uncertain conditions play a major role in entrepreneurial decision-making. Experienced small business entrepreneurs address uncertain conditions through effectuation without any difference in the dislike of risk than any other person. Effectuation means taking small steps to try different approaches and limiting risk to each small trial. This technique allows the small business to focus on opportunities instead of extensive planning. This approach allows entrepreneurs to take action instead of letting uncertain conditions paralyze them (Read, Dew, Sarasvathy, Song, & Wiltbank, 2008).
Some general guidelines about dealing with different risks a small business entrepreneur might face include:
Gaining Market Acceptance. Gaining market acceptance is critical for survival. Successful small businesses deal with this sooner rather than later.
Attracting Key Management. Typically, a small business delays hiring key management until achieving a sustainable level. A firm can employ experts outside the firm until the time is right to find the right person.
Technological Changes. Again successful small businesses hold off in dealing with such changes until achieving a sustainable level. The firm can employ outside experts until achieving such levels.
Gaining Needed Licenses. Small business founders try to address needed licenses sooner rather than later. Licenses are necessary for the small business to make it to the next level.
Product Liability and Safety. Successful small business puts off dealing with such issues until they start to happen. Most small businesses do not expect facing such issues until they start to emerge (Harris, 2011).
If a small business entrepreneur has little experience he or she should have people with some experience in his or her corner to deal with uncertainty and risk management. Learn more.
Harris, J. P. (2011). Entrepreneurial success as determined by an evaluation of premarket entry risks. (D.B.A.University of Phoenix), University of Phoenix, United States — Arizona. Retrieved from http://search.proquest.com/docview/884183934?accountid=35812http://linksource.ebsco.com/linking.aspx?genre=article&issn=&volume=1&issue=&date=2011-01-01&spage=1&title=ProQuestDissertationsandTheses&atitle=Entrepreneurialsuccessasdeterminedbyanevaluationofpremarketentryrisks
McKelvie, A., Haynie, J. M., & Gustavsson, V. (2009). Unpacking the uncertainty construct: Implications for entrepreneurial action. Journal of Business Venturing, In Press, Corrected Proof, 1-20. doi: 10.1016/j.jbusvent.2009.10.004
Milliken, F. J. (1987). Three types of perceived uncertainty about the environment: State, effect, and response uncertainty. Academy of Management Review, 12(1), 133-143. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4306502&site=bsi-live
Read, S., Dew, N., Sarasvathy, S. D., Song, M., & Wiltbank, R. (2008). Marketing under uncertainty: The logic of an effectual approach Copenhagen Business School, 1-50. doi: 10.1016/j.jbusvent.2008.02.002
One of the most important considerations for starting a small business is the ability to find financing. Founders of small businesses have a variety of sources to choose from, but some sources are better than others. For example, a small business owner can use risky debt or credit cards. These sources drive up the cost of capital, but finding equity during a firm’s first few years can keep costs down and improve the likelihood of succeeding sooner.
Entrepreneurial experience improves the chance of finding equity. Zaleski (2011) found a comparative advantage exists for entrepreneurs with previous experience. This finding is particularly relevant when an entrepreneur changes industries. Potential investors may not see the experience from another industry as causing a barrier. Investors view entrepreneurs with experience as having gained valuable knowledge. Although entrepreneurs frequently fail, entrepreneurs learn from experience.
Experience plays an important role in finding equity financing during a firm’s early years. However, the lower cost of capital from obtaining equity financing can improve a small business’s chance of success. Equity sources view experience as a transferable skill and improves the business founder’s odds of finding financing.
What is your experience as a small business entrepreneur? Are you ready to jump in? Let us know your experience. Respond here!
Zaleski, P. A. (2011). Start-ups and external equity: The role of entrepreneurial experience. Business Economics, 46(1), 43-50. doi: http://www.palgrave-journals.com/be/index.html
Small business entrepreneurs can improve the likelihood of succeeding through experience and education. Many universities have programs for small business and some have entrepreneurship programs. Most of these programs cater to traditional students and are part of a traditional setting. Ask yourself if this sounds like the type of setting that allows you to pursue opportunities or does it stymie your efforts to build the business you are passionate about.
A small business entrepreneur learns more efficiently and effectively on the job, while pursuing his or her passion. Entrepreneurs do their best work trying new things and learning from what they try. A business school can talk about experimenting with ideas, but the ideas get lost or someone else pursues them before the student has an opportunity to act on them.
Entrepreneurs have more likelihood of succeeding by developing a network of experts they can rely on for areas outside their expertise. Ask yourself how an entrepreneur can network in a traditional college setting and find the needed experts he or she can rely on. The best way to find the needed expertise is to experience building business relationships on the job.
The small business owner wears many hats and can easily spread him or herself too thin. What is the best use of your time? What can you farm out to someone in your network so you can continue working on what is most important in developing opportunities?
Do you have a guide at your side? Do you have a coach and a mentor you can rely on? What do you want to get off your shoulders? Contact http://www.apgacademyofentrepreneurship.com/ for a free consultation.
I theorize that innovation works best in a small firm because different goals exist than in the larger firm. Some justification exists in the literature supporting this theory. Large firms place improving shareholder value through stock price appreciation ahead of discovery of innovative solutions (Crochetiere, 2011). Corporate managers concern themselves with shareholder wealth enhancement and emphasize short-term profitability.
Founders of small innovative firms put products and services first ahead of profitability. Steve Jobs offers a good example with his obsession to create computers for students. Job’s passion put product ahead of profits (Deutschman, 2000). Jobs exited from Apple when the company put the focus on shareholder wealth instead of perfecting the product (Levy, 2011).
Small business owners starting a company should consider their goal. A founder should consider if the motivation is to cash out or extinguish a burning fire to solve a problem with a new product or innovative service. A firm that opts for the latter should avoid acquisition by larger firms and keep it simple.
Crochetiere (2011) found evidence suggesting large firms produce fewer patents and innovations than smaller firms. Larger firms not only produce fewer patents, but lose stakeholders and their acquisitions result in greater variability in stock prices.
What is the goal for innovation in your business? If you need help planning your strategy click here!
Crochetiere, B. (2011). Transcending technological innovation: The impact of acquisitions on entrepreneurial technical organizations. (D.B.A. 3482298), Walden University, United States — Minnesota. Retrieved from http://search.proquest.com/docview/909085620?accountid=35812 ProQuest Dissertations & Theses (PQDT) database.
Deutschman, A. (2000). The second coming of Steve Jobs. New York, NY: Random House.
Levy, S. (2011). The revolution according to Steve Jobs. Wired. Retrieved from http://www.wired.com/magazine/2011/11/ff_stevejobs/all/1