2 2/ The Nature of Entrepreneurship

Adapted from Fundamentals of Business: Canadian Edition by Pamplin College of Business and Virginia Tech Libraries is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

SOURCE: StockSnap.

If we look a little more closely at the definition of entrepreneurship, we can identify three characteristics of entrepreneurial activity:⁹

Innovation. Entrepreneurship generally means offering a new product/service, applying a new technique or technology, opening a new market, or developing a new form of organization to produce or enhancing a product.

Running a business. A business combines resources to produce goods or services to make a profit.

Risk taking. The term risk means that the outcome of the entrepreneurial venture is unknown. Entrepreneurs are always working under uncertainty, and their confidence in the innovation and understanding of the business environment in which they are operating often drives decisions.

It is easy to recognize these characteristics in the entrepreneurial experience of the craft brewers. They certainly had an innovative idea. But was it a good business idea? In a practical sense, a “good” business idea must become something more than just an idea. If, like Collective Arts, you are interested in generating income from your idea, you will probably need to turn it into a product, something that you can market because it satisfies a need. If you want to develop a product, you will need organization to coordinate the resources necessary to make it a reality (a business). Risk enters the equation when you decide to start a business and commit yourself to managing it.

To jumpstart your thinking around entrepreneurship, take this short quiz to align your thinking to Richard Branson, Warren Buffett, Marissa Mayer, or another famous businessperson. (Please note: This is a general quiz and not scientific. It is just to prompt your thinking, click the bullseye).

Going into Business for Yourself

Mark Zuckerberg founded Facebook while a student at Harvard. By age 27 he built up a personal wealth of $13.5 billion. By age 31, his net worth was $37.5 billion. Regardless of hurdles his company faced in early 2018, his success as an entrepreneur is solid.

What about you? Do you ever wonder what it would be like to start your own business? You might even turn into a “serial entrepreneur” like Marcia Kilgore.¹⁰ After high school, she moved from Canada to New York City to attend Columbia University. When her financial aid was delayed, Marcia abandoned her plans to attend college and took a job as a personal trainer (a natural occupation for a former bodybuilder and middleweight title holder). Things got boring in the summer when her wealthy clients left the city for the Hamptons. To keep busy, she took a skin care course at a Manhattan cosmetology institute. As a teenager, she was self-conscious about her complexion and wanted to know how to treat it herself. She learned how to give facials and work with natural remedies. She started giving facials to her fitness clients who were thrilled with the results. As demand for her services exploded, she started her first business (Bliss Spa) and picked up celebrity clients, including Madonna, Oprah Winfrey, and Jennifer Lopez. The business went international, and she sold it for more than $30 million.¹¹

The story does not end here; she launched two more companies: Soap and Glory (picture inset), a supplier of affordable beauty products sold at Target, and FitFlops, which sells sandals that tone and tighten your leg muscles as you walk. Oprah loves Kilgore’s sandals and plugged them on her show.¹² You cannot get a better endorsement than that. Kilgore never finished college, but when asked if she would follow the same path again, she said, “If I had to decide what to do all over again, I would make the same choices… I found by accident what I’m good at, and I’m glad I did.” (SOURCE: SoapandGlory.com)

Why Start Your Own Business?

What sort of characteristics distinguishes those who start businesses from those who do not? Or, more to the point, why do some people follow through on the desire to start their own businesses? The most common reasons for starting a business are:

Be your own boss.

Accommodate a desired lifestyle.

Achieve financial independence.

Enjoy creative freedom.

Use your skills and knowledge.

How can you translate characteristics into potential success? Experts suggest you assess your strengths and weaknesses by asking yourself a few relevant questions:¹³

Am I a self-starter? You will need to develop and follow through on your ideas.

How well do I get along with unique personalities? Strong working relationships with a variety of people are crucial.

How good am I at deciding? Under pressure?

Do I have the physical and emotional stamina? Expect six or seven workdays of about twelve hours every week.

How well do I plan and organize? Poor planning is the culprit in most business failures.

How will my business affect my family? Family members need-to-know what to expect: long hours and, at least initially, a more modest standard of living.

Before we discuss why businesses fail, we should consider why a huge number of business ideas never even make it to the grand opening. One business analyst cites four reservations (or fears) that prevent people from starting businesses:¹⁴

Money. Without cash, you cannot get very far. What to do: line up initial financing early or at least have done enough research to have a plan to raise money.

Security. Many people do not want to sacrifice the steady income that comes with the nine-to-five job. Do not give up your day job and run the business part-time or connect with someone to help run your business, a “cofounder”.

Competition. many people do not know how to distinguish their business ideas from similar ideas. Figure out how to do something cheaper, faster, or better.

Lack of ideas. Some people simply do not know what sort of business they want to get into. What to do: find out what trends are successful. Turn a hobby into a business. Think about a franchise. Find a solution to something that annoys you, entrepreneurs call this a “pain point” and try to turn it into a business.

If you are still interested in going into business for yourself, try to regard such drawbacks as mere obstacles to be overcome by a combination of planning and creative thinking.

Sources of Early-Stage Financing

As noted above, many businesses fail, or never get started, because of a lack of funds. But where can an entrepreneur raise money to start a business? Friends and family finance many first-time entrepreneurs, at least in the very early stages. Others may borrow through their personal credit cards, though often, high-interest rates make this approach unattractive or too expensive for the new business to afford.

An entrepreneur with a great idea may win funding through a pitch competition; local municipalities and government agencies understand that economic growth depends on successful new businesses, and so they will often conduct such competitions hoping to attract them.

Crowd funding has become more common to raise capital. An entrepreneur using this approach would typically use a crowd funding platform like Kickstarter or GoFundMe to attract investors. The entrepreneur might offer tokens of appreciation for funds or might offer an ownership stake for a substantial enough investment. Take a few moments to peruse Kickstarter or another site and see what types of businesses they propose in your area or trending globally.

SOURCE: Fast Company.

Some entrepreneurs receive funding from angel investors, affluent investors who provide capital to startups for an ownership position in the company. Many angels are successful entrepreneurs themselves and invest not only to make money but also to help other aspiring business owners to succeed.

Venture capital firms also invest in startup companies, although usually at a somewhat later stage and in larger dollar amounts than would be typical of angel investors. Like angels, venture firms also take an ownership position in the company. They usually have a higher expectation of making a return on their money than do angel investors.

Entrepreneurs versus Small Business Owners

Though most entrepreneurial ventures begin as small businesses, not all small business owners are entrepreneurs. Entrepreneurs are innovators who start companies to create new or improved products. They strive to meet a need that is not being met, and their goal is to grow the business and eventually expand into other markets.

In contrast, many people either start or buy small businesses for providing an income for themselves and their families. They do not intend to be innovative, nor do they plan to expand significantly. This desire to operate is what is sometimes called a lifestyle business.¹⁵ The neighbourhood pizza parlour or beauty shop, the self-employed consultant who works out of the home, and even a local printing company, many of these are typically lifestyle businesses.

The Importance of Small Business to the Canadian Economy

What Is a “Small Business”?

To assess the value of small businesses to the Canadian economy, we first need to know what makes up a small business. In 2012, Industry Canada defined small business as firms that have fewer than 100 employees. A small business is one that is independently owned and operated, exerting little influence in its industry.

Why Are Small Businesses Important?

Small business is a force in the Canadian and other economies. The millions of individuals who have started businesses have helped shape the business world as we know it today. Some small business founders like Henry Ford and Thomas Edison have even gained places in history. Others, including Bill Gates (Microsoft), Mike Lazaridis (Research in Motion), Steve Jobs (Apple Computer), and Larry Page and Sergey Brin (Google), have changed global business today.

Aside from contributions to our general economic wellbeing, founders of small businesses also contribute to growth and vitality in specific areas of economic and socioeconomic development. Small businesses:

Create jobs.

Spark innovation.

Provide opportunities for many people, including women and minorities, to achieve financial success and independence.

In addition, they complement the economic activity of large organizations by providing them with components, services, and distribution of their products. Let us inspect each of these contributions.

Job Creation

Most Canadian workers first entered the business world working for small businesses. Although the split between those working in small companies and those working in big companies is about even, small firms hire more frequently and fire more regularly than do big companies.¹⁶ Why is this true? At any point in time, lots of small companies start and some expand. These small companies need workers and so hiring takes place. But the survival and expansion rates for small firms is poor, and so, again at any point in time, many small businesses close or contract and workers lose their jobs. Small firms add more jobs over time, increasing the number of workers.

The size of the net increase in the number of workers for any year depends on several factors, with the economy being at the top of the list. A robust economy encourages individuals to start small businesses and expand existing small companies, which adds to the workforce. A weak economy does just the opposite, it discourages startups and expansions, which decreases the workforce through layoffs.

Innovation

Given the financial resources available to large businesses, you would expect them to introduce virtually all the new products that hit the market. Yet according to the United States’s Small Business Administration (SBA), small companies develop more patents per employee than do larger companies. During a recent four-year period, large firms generated 1.7 patents per hundred employees, while small firms generated an impressive 26.5 patents per employee.¹⁷ Although similar statistics are not available for Canada, our business practices tend to align with our neighbours in the United States.

Over the years, the list of important innovations by small firms has included the airplane, air-conditioning, DNA “fingerprinting”, and overnight national delivery.¹⁸

SOURCE: Supermarket News.

Small business owners are also particularly adept at finding fresh ways of doing old things. In 1994, a young computer-science graduate working on Wall Street came up with the novel idea of selling books over the Internet. During the first year of operations, sales at Jeff Bezos’ new company, Amazon.com, reached $500,000. In less than 20 years, annual sales had topped $107 billion.¹⁹ Not only did his innovative approach to online retailing make Bezos enormously rich, but it also established a viable model for the e-commerce industry. In 2018, Amazon’s model is creeping into the physical. Shortly after entering the grocery market by acquiring Whole Foods, they prototype a cashier-less and checkout-less store by using your Amazon account via an application.

Why are small businesses so innovative? They can offer environments that appeal to individuals with the talent to invent new products or improve the process. They encouraged fast decision-making, their research programs are focused, and their compensation structures typically reward top performers.

According to one SBA study, the supportive environments of small firms are roughly 13 times more innovative per employee than the less innovation-friendly environments in which large firms traditionally operate.²⁰

The success of small businesses in fostering creativity has not gone unnoticed by big businesses. In fact, many large companies have responded by downsizing to act more like small companies. Some large organizations now have separate work units whose purpose is to spark innovation. Individuals working in these units can focus their attention on creating new products that the company can then develop.

Opportunities for Women

Small business is the portal through which many people enter the economic mainstream. Business ownership allows individuals to achieve financial success, as well as pride in their accomplishments. While most small businesses are still owned by white males, the past two decades have seen a substantial increase in the number of businesses owned by women.

Canada’s 2018 budget had continued investment in women entrepreneurs. On February 28, 2018, the Financial Post reported:

“By far, the largest net new impact on Canada’s entrepreneurial class is the $1.65 billion in new financing being made available to women business owners, to be delivered over three years through the Business Development Bank of Canada and Export Development Canada.”

Test your knowledge on women’s entrepreneurship at Virgin.com.

An interactive or media element has been excluded from this version of the text. You can view it online here: Link.

What Industries Are Small Businesses In?

If you want to start a new business, you probably should avoid certain types of businesses. You would have a hard time, for example, setting up a new company to make automobiles or aluminum, because you would have to make tremendous investments in property, plant and equipment, and raise an enormous amount of capital to pay your workforce. These large, up-front investments present barriers to entry.

Fortunately, plenty of opportunities are still available. Many types of businesses require reasonable initial investments, and these are the ones that usually present attractive small business opportunities.

Advantages and Disadvantages of Business Ownership

Do you want to be a business owner someday? Before deciding, consider the following advantages and disadvantages of business ownership.²¹

Advantages of Small Business Ownership

Being a business owner can be extremely rewarding. Having the courage to take a risk and start a venture is part of the North American dream. Success brings with it many advantages:

An interactive or media element has been excluded from this version of the text. You can view it online here: Link.

Disadvantages of Small Business Ownership

As the little boy said when he got off his first roller-coaster ride, “I like the ups but not the downs!” Here are some risks to starting a small business:

An interactive or media element has been excluded from this version of the text. You can view it online here: Link.

Despite these and other disadvantages, most small business owners are happy starting a business. A survey conducted by the Wall Street Journal and Cicco and Associates shows that small business owners and top-level corporate executives agree overwhelmingly that small business owners have a more satisfying business experience.

Interestingly, the researchers had fully expected to find that small business owners were happy with their choices; they were, however, surprised at the number of corporate executives who believed that the grass was greener in the world of small business ownership.²²

Starting a Business

Starting a business takes talent, determination, hard work, and persistence. It also requires a lot of research and planning. Before starting your business, appraise your strengths and weaknesses and assess your personal goals to determine whether business ownership is for you.²³

Questions to Ask Before You Start a Business

If you are interested in starting a business, you need to address these questions:

What, exactly, is my business idea? Is it workable?

What industry do I want to enter?

What will be my competitive advantage?

Do I want to start a new business, buy an existing one, or buy a franchise?

What form of business organization do I want?

After making these decisions, you will be ready to take the most important step in the entire process of starting a business: you must describe your future business as a business plan, a document that identifies the goals of your proposed business and explains how to achieve these goals. Think of a business plan as a blueprint for a proposed company: it shows how you intend to build the company and how you intend to make sure that it is sturdy. You must also take a second crucial step before you start your business, acquiring financing (the money that you will need to start your business).

The Business Idea

For some people, coming up with a great business idea is a gratifying adventure. For most, however, it is a daunting task. The key to coming up with a business idea is identifying something that customers want; or perhaps filling an unmet need. Your business will probably survive only if its purpose is to satisfy its customers, the ultimate users of its goods or services. In coming up with a business idea, do not ask, “What do we want to sell?” but “What does the customer want to buy?”²⁴

To come up with an innovative business idea, you need to be creative. The idea itself can come from various sources. Prior experience accounts for the bulk of new business idea and increases your chances of success. Take Sam Walton, the late founder of Walmart. He began his retailing career at JC Penney and then became a successful franchisor of a Ben Franklin five-and-dime store. In 1962, he came up to open large stores in rural areas, with low costs and heavy discounts. He founded his first Walmart store in 1962, and when he died 30 years later, his family’s net worth was $25 billion.²⁵

Industry experience also gave Howard Schultz, a New York executive for a housewares company, his breakthrough idea. In 1981, Schultz noticed that a small customer in Seattle (Starbucks Coffee, Tea, and Spice) ordered more coffeemaker cone filters than Macy’s and many other large customers. He flew across the country to find out why. His meeting with the owner-operators of the original Starbucks Coffee Co. resulted in his becoming part-owner of the company. Schultz’s vision for the company far surpassed that of its other owners. While they wanted Starbucks to remain small and local, Schultz saw potential for a national business that not only sold world-class-quality coffee beans but also offered customers a European coffee-bar experience. After attempting unsuccessfully to convince his partners to try his experiment, Schultz left Starbucks and started his own chain of coffee bars, which he called Il Giornale (after an Italian newspaper). Two years later, he bought out the original owners and reclaimed the name Starbucks.²⁶

Ownership Options

As we have already seen, you can become a small business owner in one of three ways: 1. starting a new business, 2. buying an existing one, or 3. getting a franchise.

Starting from Scratch

The most common (and the riskiest) option is starting from scratch. This approach lets you start with a clean slate and allows you to build the business the way you want. You select the goods or services that you are going to offer, secure your location, and hire your employees, and then it is up to you to develop your customer base and build your reputation. This was the path taken by Andres Mason who figured out how to inject hysteria into the process of bargain hunting on the Web. The result is an overnight success story called Groupon.²⁷ Here is how Groupon (a blend of the words “group” and “coupon”) works: A daily email to over 6.5 million people in over 70 cities across the United States and Canada offering a deeply discounted deal to buy something or to do something in their city. If the person receiving the email likes the deal, he or she commits to buying it. Here is the catch, they cancel the deal if not enough people sign up for it. Groupon makes money by keeping half of the revenue from the deal. The company offering the product or service gets exposure. But stay tuned: the “daily deals website isn’t just unprofitable, it is bleeding hundreds of millions of dollars.”²⁸ As with all startups cash is always a challenge.

Buying an Existing Business

If you decide to buy an existing business, some things will be easier because you will already have a proven product, current customers, active suppliers, a known location, and trained employees. The company’s history will make It is easier to predict the business’s future success.

There are, of course, a few bumps in this road to business ownership. First, it is hard to determine how much you should pay for a business. You can easily determine how many things like buildings and equipment are worth, but how much should you pay because the business has steady customers?

In addition, a business, like a used car, might have performance problems that you cannot detect without a test drive (an option, unfortunately, that you do not get when you are buying a business). Perhaps the current owners have disappointed customers; maybe the location is not as good as it used to be. You might inherit employees you would not have hired yourself. Careful study called due diligence is necessary before going down this road.

Getting a Franchise

You can buy a franchise. A franchisor (the company that sells the franchise) grants the franchisee (the buyer, you) the right to use a brand name and to sell its goods or services. Franchises market products in a variety of industries, including food, retail, hotels, travel, real estate, business services, cleaning services, and even weight loss centres and wedding services. The Figure below lists the top ten franchises according to Entrepreneur Magazine for 2018. Franchises apply to be on the list and assessed using Entrepreneur’s five pillars.

Table 2. Top Ten Franchises in 2018 According to Entrepreneur Magazine

In Canada, 1 out of every 14 workers is directly or indirectly employed by the franchise industry and there are about 1,300 franchise brands operating in Canada. Individual investments vary widely, from $10,000 to millions. KFC franchises, for example, require a total investment of $1.3 million to $2.5 million each. This fee includes the cost of the property, equipment, training, startup costs, and the franchise fee, a onetime charge for the right to operate as a KFC outlet. McDonald’s is in the same price range ($1 million to $2.3 million). SUBWAY sandwich shops offer a more affordable alternative, with expected total investment ranging from $116,000 to $263,000. Visit Canadian Franchising Opportunities²⁹to see franchises by level of investment required.

Besides your initial investment, you might pay two other fees monthly, a royalty fee (typically from 3% to 12% of sales) for continued support from the franchisor, and the right to keep using the company’s trade name, plus an advertising fee to cover your share of national and regional advertising. The franchisor will expect you to buy your products from them.³⁰

But there are disadvantages. The cost of obtaining and running a franchise can be high, and you must play by the franchisor’s rules, even when you disagree with them. The franchisor maintains a great deal of control over its franchisees. For example, if you own a fast food franchise, the franchise agreement will probably dictate the food and beverages you can sell; the methods used to store, prepare, and serve the food; and the prices you will charge. In addition, the agreement will dictate what the premises will look like and how they will maintain. As with any business venture, you need to do your homework before investing in a franchise.

Why Do Some Businesses Fail?

If you have paid attention to the occupancy of shopping malls over a few years, you have noticed that retailers come and go with surprising frequency. The same thing happens with restaurants, indeed, with all kinds of businesses. Starting a business, small or large, is risky, and though many businesses succeed, a large proportion of them do not. The most recent, official statistics for Canada, from 2013, report the following for the births and deaths of SMEs. Consult the table below or find the equivalent, text information from Industry Canada. Note: These statistics do not deal directly with entrepreneurs, but with small and medium enterprises or SMEs.

As disappointing as these statistics on business survival are, some industries are worse than others. If you want to stay in business for a long time, avoid some of these risky industries. Even though your friends think you make the best pizza in the world, this does not mean you can succeed as a pizza parlour owner. Opening a restaurant or a bar is one of the riskiest ventures (and, therefore, startup funding is hard to get).

You might also want to avoid the transportation industry. Owning a taxi might appear lucrative until you find out what a taxi license costs. It obviously varies by city, but in New York City the price tag is upward of $400,000. No wonder taxi companies are resisting Uber and Lyft with all the energy they can muster. And setting up a shop to sell clothing can be challenging. Your view of “what is in” may be off, and one poor season can kill your business. The same is true for stores selling communication devices: every mall has one or more cell phone stores so the competition is steep, and business can be very slow.³¹

Businesses fail for many reasons, but many experts agree many failures result from some combination of the following problems:

Bad business idea. Like any idea, a business idea can be flawed, either in the conception or in the execution. If you tried selling snow blowers in Hawaii, you could count on little competition, but likely fail.

Cash problems. Too many new businesses are under-funded. The owner borrows enough money to set up the business but does not have enough extra cash to operate during the startup phase, when very little money is coming in, but a lot is going out.

Managerial inexperience or incompetence. Many new business owners have no experience in running a business; many have limited management skills. Maybe an owner knows how to make or market a product but does not know how to manage people; an owner can’t attract and keep talented employees; or an owner has poor leadership skills and isn’t willing to plan.

Lack of customer focus. A major advantage of a small business is the ability to provide special attention to customers. But some small businesses cannot seize this advantage. Perhaps the owner does not expect customers’ needs or keep up with changing markets or the customer-focused practices of competitors.

Inability to handle growth. You would think that a sales increase would be a good thing. Often it is, of course, but sometimes it can be a major problem. When a company grows, the owner’s role changes. He or she needs to delegate work to others and build a business structure that can handle the increase in volume. Some owners do not transition and find themselves overwhelmed. Things do not get done, customers become unhappy, and expansion damages the company.

Some Canadian Considerations

This chapter provided some solid, foundational knowledge on entrepreneurship. But take a few moments to see who might be left behind in the growth of entrepreneurship.

An interactive or media element has been excluded from this version of the text. You can view it online here: Link.

Footnotes