To my wife Jan. Thanks for your never-ending encouragement and support. Without you, this book would have never been possible. Also, thanks to all the student entrepreneurs who contributed to the chapter opening features in the book. Your stories are both insightful and inspiring.
—BruceR.Barringer
To my family: I am so proud of each of you and so blessed by your perseverance and never-ending love and support. I know that sometimes it seems as though “we lose ourselves in work to do and bills to pay and that it’s a ride, ride, ride without much cover.” But you are always in my heart, a gift for which I remain deeply grateful.
R.Duane Ireland
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BRIEF CONTENTS
PART 1 Decision to Become an Entrepreneur1
CHAPTER 1 Introduction to Entrepreneurship 3
PART 2 Developing Successful Business Ideas39
CHAPTER 2 Recognizing Opportunities and Generating Ideas41
CHAPTER 3 Feasibility Analysis 77
CHAPTER 4 Writing a Business Plan111
CHAPTER 5 Industry and Competitor Analysis 147
CHAPTER 6 Developing an Effective BusinessModel179
PART 3 Moving from an Idea to an Entrepreneurial Firm211
CHAPTER 7 Preparing the Proper Ethical and Legal Foundation213
CHAPTER 8 Assessing a New Venture’s Financial Strength and Viability253
CHAPTER 9 Building a New-Venture Team289
CHAPTER 10 Getting Financing or Funding319
PART 4 Managing and Growing an Entrepreneurial Firm355
CHAPTER 11 Unique Marketing Issues357
CHAPTER 12 The Importance of Intellectual Property393
CHAPTER 13 Preparing for and Evaluating the Challenges of Growth431
CHAPTER 14 Strategies for Firm Growth 461
CHAPTER 15 Franchising495
Glossary535
Name Index547
Company Index551
Subject Index557
Prefacexvii
PART 1 Decision to Become an Entrepreneur1
CHAPTER 1 Introduction to Entrepreneurship 3
Opening Profile—GIFTZIP.COM: The Classic Entrepreneurial Story3
INTRODUCTION TO ENTREPRENEURSHIP4
What Is Entrepreneurship?6
Why Become an Entrepreneur?7
Characteristics of Successful Entrepreneurs9
WHAT WENT WRONG? How a Lack of Passion and Too Few Customers
Can Kill a Business12
SAVVY ENTREPRENEURIAL FIRM: Angry Birds and Zeo14
Common Myths About Entrepreneurs15
Types of Start-Up Firms17
CHANGING DEMOGRAPHICS OF ENTREPRENEURS18
ENTREPRENEURSHIP’S IMPORTANCE21
Economic Impact of Entrepreneurial Firms21
Entrepreneurial Firms’ Impact on Society22
Entrepreneurial Firms’ Impact on Larger Firms22
PARTNERING FOR SUCCESS: Working Together: How Biotech Firms and Large Drug Companies Bring Pharmaceutical Products to Market23
THE ENTREPRENEURIAL PROCESS23
Decision to Become an Entrepreneur (Chapter 1)24
Developing Successful Business Ideas (Chapters 2–6)24
Moving from an Idea to an Entrepreneurial Firm (Chapters 7–10)25
Managing and Growing an Entrepreneurial Firm (Chapters 11–15)26
Application Questions239 | You Be the VC 7.1241 | You Be the VC 7.2242 | CASE 7.1242 | CASE 7.2244
ENDNOTES247
Appendix 7.1249
CHAPTER 8 Assessing a New Venture’s Financial Strength and Viability253
Opening Profile—KLYMIT: The Critical Importance of Cash Flow253
INTRODUCTION TO FINANCIAL MANAGEMENT255
Financial Objectives of a Firm256
The Process of Financial Management257
PARTNERING FOR SUCCESS: Organizing Buying Groups to Cut Costs and Maintain Competitiveness258
FINANCIAL STATEMENTS AND FORECASTS259
Historical Financial Statements260
SAVVY ENTREPRENEURIAL FIRM: Know the Facts Behind the Numbers262
Forecasts267
PRO FORMA FINANCIAL STATEMENTS271
WHAT WENT WRONG? Be Careful What You Wish For: How Growing Too Quickly Overwhelmed One Company’s Cash Flow272
Pro Forma Income Statement273
Pro Forma Balance Sheet273
Pro Forma Statement of Cash Flows275
Ratio Analysis277
Chapter Summary278 | Key Terms278 | Review Questions279 Application Questions279 | You Be the VC 8.1281 | You Be the VC 8.2281 | CASE 8.1282 | CASE 8.2284
ENDNOTES286
CHAPTER 9 Building a New-Venture Team289
Opening Profile—SCRIPPED: Hitting the Ground Running289
CREATING A NEW-VENTURE TEAM291
The Founder or Founders292
WHAT WENT WRONG? Devver: How Miscues in Regard to the Composition and Management of a New-Venture Team Can Kill a Start-up293
Recruiting and Selecting Key Employees296
SAVVY ENTREPRENEURIAL FIRM: Overcoming a Lack of Business Experience297
The Roles of the Board of Directors300
ROUNDING OUT THE TEAM: THE ROLE OF PROFESSIONAL ADVISERS302
Board of Advisers302
Lenders and Investors303
PARTNERING FOR SUCCESS: Need Help with Product Development? Consider Establishing a Customer Advisory Board304
Other Professionals306
Chapter Summary307 | Key Terms308 | Review Questions308 Application Questions308 | You Be the VC 9.1310 | You Be the VC 9.2311 | CASE 9.1311 | CASE 9.2313
ENDNOTES316
CHAPTER 10 Getting Financing or Funding319
Opening Profile—INDINERO: Raising Money Carefully and Deliberately319
THE IMPORTANCE OF GETTING FINANCING OR FUNDING321
Why Most New Ventures Need Funding321 Sources of Personal Financing322
Preparing to Raise Debt or Equity Financing324
PARTNERING FOR SUCCESS: TechStars and Y Combinator: A New Breed of Start-Up Incubators328
SOURCES OF EQUITY FUNDING329
Business Angels329
Venture Capital330
SAVVY ENTREPRENEURIAL FIRM: Open Angel Forum and AngelList: New Options for Getting in Front of Angel Investors332
WHAT WENT WRONG? How One Start-Up Caught the Attention of VCs, Raised Money, and Still Failed334
Initial Public Offering335
SOURCES OF DEBT FINANCING336
Commercial Banks337
SBA Guaranteed Loans338
Other Sources of Debt Financing338
CREATIVE SOURCES OF FINANCING AND FUNDING339
Leasing339
SBIR and STTR Grant Programs340
Student Resources
CourseSmart eTextbook—CourseSmart eTextbooks were developed for students looking to save on required or recommended textbooks. Students simply select their eText by title or author and purchase immediate access to the content for the duration of the course using any major credit card. With a CourseSmart eText, students can search for specific keywords or page numbers, take notes online, print out reading assignments that incorporate lecture notes, and bookmark important passages for later review. For more information or to purchase a CourseSmart eTextbook, visit www.coursesmart.com.
Companion Website: www.pearsonhighered.com/barringer—contains free access to a student version of the PowerPoint package, chapter quizzes, and links to featured Web sites.
Business Feasibility Analysis Pro—This wizard-based software is a step-by-step guide and an easy-to-use tool for completing a feasibility analysis of a business idea. The program allows instructors the flexibility to assign each step in the feasibility analysis separately or to assign the entire feasibility analysis as a semester-long project. It can be packaged with the textbook at a nominal cost.
FEEDBACK
If you have questions related to this book about entrepreneurship, please contact our customer service department online at http://247.pearsoned.com.
ACKNOWLEDGMENTS
We are pleased to express our sincere appreciation to four groups of people for helping bring both editions of our book to life.
Prentice Hall Professionals
A number of individuals at Prentice Hall have worked with us conscientiously and have fully supported our efforts to create a book that will work for those both studying and teaching the entrepreneurial process. From Prentice Hall, we want to extend our sincere appreciation to our senior acquisitions editor, Kim Norbuta; our director of marketing, Patrice Lumumba Jones; and our editorial project manager, Claudia Fernandes. Each individual provided us invaluable guidance and support, and we are grateful for their contribution.
Student Entrepreneurs
We want to extend a heartfelt “thank you” to the student entrepreneurs who contributed to the opening features in our book. Our conversations with these individuals were both informative and inspiring. We enjoyed getting to know these bright young entrepreneurs, and wish them nothing but total success as they continue to build their ventures.
Academic Reviewers
We want to thank our colleagues who participated in reviewing individual chapters of the book while they were being written. We gained keen insight from these individuals (each of whom teaches courses in entrepreneurship) and incorporated many of the suggestions of our reviewers into the final version of the book.
Thank you to these professors who participated in reviews:
Dr.RichardBartlett, Columbus State Community College
GregBerezewski, Robert Morris College
JeffBrice, Jr., Texas Southern University
RalphJagodka, Mt. San Antonio College
ChristinaRoeder, James Madison University
AronS.Spencer, New Jersey Institute of Technology
VincentWeaver, Greenville Technical College
LisaZidek, Florida Gulf Coast University
Academic Colleagues. We thank this large group of professors whose thoughts about entrepreneurial education have helped shape our book’s contents and presentation structure:
DavidC.Adams, Manhattanville College
SolAhiarah, SUNY—Buffalo State College
FredericAiello, University of Southern Maine
JamesJ.AllingSr., Augusta Technical College
JeffreyAlstete, Iona College
JeffreyAlves, Wilkes University
JoeAniello, Francis Marion University
MaryAvery, Ripon College
JayAzriel, Illinois State University
RichardBarker, Upper Iowa University
JimBell, Texas State University
RobertJ.Berger, SUNY Potsdam
JamesBloodgood, Kansas State University
JenellBramlage, University of Northwestern Ohio
MichaelBrizek, South Carolina State University
BarbBrown, Southwestern Community College
JamesBurke, Loyola University—Chicago
LowellBusenitz, University of Oklahoma
JohnButler, University of Texas—Austin
JaneByrd, University of Mobile
ArtCamburn, Buena Vista University
CarolCarter, Louisiana State University
GaylenChandler, Utah State University
JamesChrisman, Mississippi State University
DelenaClark, Plattsburgh State University
DeeCole, Middle Tennessee State University
RoyCook, Fort Lewis College
AndrewCorbett, Babson College
SimoneCummings, Washington University School of Medicine
SuzanneD’Agnes, Queensborough Community College
DouglasDayhoff, Indiana University
FrankDemmler, Carnegie Mellon University
DavidDesplaces, University of Hartford/Barney
VernDisney, University of South Carolina—Sumter
DaleEesley, University of Toledo
AlanEisner, Pace University
SusanEverett, Clark State Community College
HenryFernandez, North Carolina Central University
CharlesFishel, San Jose State University
DanaFladhammer, Phoenix College
BrendaFlannery, Minnesota State University
JohnFriar, Northeastern University
BarbaraFuller, Winthrop University
BarryGilmore, University of Memphis
CarolineGlackin, Delaware State University
CherylGracie, Washtenaw Community College
FrederickGreene, Manhattan College
LeeGrubb, East Carolina University
BradHandy, Springfield Technical Community College
CarnellaHardin, Glendale College
AshleyHarmon, Southeastern Technical College
SteveHarper, University of North Carolina at Wilmington
AlanHauff, University of Missouri—St. Louis
GordonHaym, Lyndon State College
AndreaHershatter, Emory University
RichardHilliard, Nichols College
JoHinton, Copiah Lincoln Community College
DennisHoagland, LDS Business College
KathieHolland, University of Central Florida
FrankHoy, University of Texas at El Paso
JeffreyJackson, Manhattanville College
GrantJacobsen, Northern Virginia Community College–Woodbridge
SusanJensen, University of Nebraska— Kearney
AlecJohnson, University of St. Thomas
JamesM.Jones, University of the Incarnate Word, ERAU, Del Mar College
JaneJones, Mountain Empire Community College
JoyJones, Ohio Valley College
TomKaplan, Fairleigh Dickinson University—Madison
ElizabethKisenwether, Penn State University
JamesKlingler, Villanova University
EdwardKuljian, Saint Joseph’s University
JamesLang, Virginia Tech University
AllonLefever, Eastern Mennonite University
AnitaLeffel, University of Texas—San Antonio
GaryLevanti, Polytechnic University— LI Campus
BenyaminLichtenstein, University of Massachusetts, Boston
BruceLynskey, Vanderbilt University
JaniceMabry, Mississippi Gulf Coast Community College
JeffreyMartin, University of Alabama
GregMcCann, Stetson University
ElizabethMcCrea, Pennsylvania State— Great Valley
BrianMcKenzie, California State University—Hayward
ChrisMcKinney, Vanderbilt University
DaleMeyer, University of Colorado
StevenC.Michael, University of Illinois Urbana—Champaign
AngelaMitchell, Wilmington College
BryantMitchell, University of Maryland— Eastern Shore
RobMitchell, University Western Ontario
PatrickMurphy, DePaul University
CharlieNagelschmidt, Champlain College
WilliamNaumes, University of New Hampshire
ConnieNichols, Odessa College
GaryNothnagle, Nazareth College
EdwardO’Brien, Scottsdale Community College
DavidOrozco, Florida State University
HaesunPark, Louisiana State University
JohnPfaff, University of the Pacific
JosephPicken, University of Texas at Dallas
Emmelinede Pillis, University of Hawaii— Hilo
CarolReeves, University of Arkansas
JohnRichards, Brigham Young University
ChristoRoberts, University of Minnesota— Twin Cities
GeorgeRoorbach, Lyndon State College
MichaelRubach, University of Central Arkansas
JaniceRustia, University of Nebraska Medical Center
JamesSaya, The College of Santa Fe
WilliamScheela, Bemidji State University
GerryScheffelmaier, Middle Tennessee State University
GeraldSegal, Florida Gulf Coast University
CynthiaSheridan, St. Edward’s University
DonaldShifter, Fontbonne University
C. L. J.Spencer, Kapi’olani Community College
JosephStasio, Merrimack College
DeborahStreeter, Cornell University
DaraSzyliowicz, University of Denver
ClintB.Tankersley, Syracuse University
CraigTunwall, Empire State College
BarryVan Hook, Arizona State University
GeorgeVozikis, University of Tulsa
DavidWilemon, Syracuse University
CharleneWilliams, Brewton Parker College
Doug Wilson, University of Oregon
DianaWong, Eastern Michigan University
Finally, we want to express our appreciation to our home institutions (Oklahoma State University and Texas A&M University) for creating environments in which ideas are encouraged and supported.
We wish each of you—our readers—all the best in your study of the entrepreneurial process. And, of course, we hope that each of you will be highly successful entrepreneurs as you pursue the ideas you’ll develop at different points in your careers.
ABOUT THE AUTHORS
BruceR.Barringer
Bruce R. Barringer holds the Johnny D. Pope Entrepreneurship Chair in the Department of Entrepreneurship at Oklahoma State University. He earned his PhD from the University of Missouri and his MBA from Iowa State University. His research interests include feasibility analysis, firm growth, corporate entrepreneurship, and the impact of interorganizational relationships on business organizations. Over the years, he has worked with a number of technology-based incubators and student-led entrepreneurship activities and clubs.
He serves on the editorial review board of Entrepreneurship Theory and Practice and Journal of Small Business Management . His work has been published in Strategic Management Journal, Journal of Management, Journal of Business Venturing , Journal of Small Business Management , Journal of Developmental Entrepreneurship, and Quality Management Journal.
Bruce’s outside interests include running, trail biking, and swimming.
R.Duane Ireland
R. Duane Ireland is a University Distinguished Professor and holds the Conn Chair in New Ventures Leadership in the Mays Business School, Texas A&M University. Previously, he served on the faculties at University of Richmond, Baylor University, and Oklahoma State University. His research interests include strategic entrepreneurship, corporate entrepreneurship, strategic alliances, and effectively managing organizational resources.
Duane’s research has been published in journals such as Academy of Management Journal, Academy of Management Review, Academy of Management Executive, Strategic Management Journal, Administrative Science Quarterly, Journal of Management, Journal of Business Venturing, Entrepreneurship Theory and Practice, and Strategic Entrepreneurship Journal among others. He is a co-author of both scholarly books and textbooks, including best-selling strategic management texts. Along with Dr. Mike Morris (Syracuse University), Duane serves as a co-editor for the Prentice Hall Entrepreneurship Series. These books offer in-depth treatments of specific entrepreneurship topics, such as Business Plans for Entrepreneurs (authored by Bruce Barringer).
Duane has served or is serving on the editorial review boards for a number of journals, including AMJ, AMR, AME, JOM, JBV, and ETP. He just completed a term as Editor for AMJ. He has completed terms as an associate editor for AME and as a consulting editor for ETP and has served as a guest co-editor for special issues of a number of journals including AMR, AME, and SMJ. He is a Fellow of the Academy of Management and a Fellow of the Strategic Management Society. He is the current Vice President and Program Chair for the Academy of Management. He is the recipient of both teaching and research awards.
Duane’s outside interests include running, reading, listening to a variety of music, and playing with his grandson.
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PART 1 Decision to Become an Entrepreneur
CHAPTER 1
Introduction to Entrepreneurship
CHAPTER 1 Introduction to Entrepreneurship
GIFTZIP.COM
The Classic Entrepreneurial Story
Web: www.giftzip.com
Twitter: GiftZip
Facebook: GiftZip
It all started in a sustainable supply chain management class at Michigan State University. Sam Hogg, an MBA student, started thinking about the waste plastic gift cards create. The class challenged Hogg and his classmates to think about the path that a product travels from inception to disposal. Gift cards are made, sold, redeemed, and are then immediately discarded—a wasteful supply chain. In fact, according to Plenty,a leading sustainable periodical, about 75 million pounds of them go into landfills every year.1
Largely as result of his experience in this class, in November 2008, roughly eight months after he earned his MBA, Hogg launched GiftZip.com, an online gift card aggregation site. The site allows people to buy electronic gift cards from popular retailers like Amazon.com, Target, Bass Pro Shops, and Pottery Barn. All are delivered in ways that address Hogg’s sustainability concerns. For example, if you log onto GiftZip.com and click on the Pottery Barn icon, you’re sent to Pottery Barn’s gift card site. There, you can buy a gift card for between $25 and $250, and it’s delivered via e-mail or Facebook. You can also select from Pottery Barn’s choices for the design of the card, or upload your own design. The card will be electronically delivered to the recipient within hours, with a message saying it came from you. The recipient can then take the e-mail or Facebook voucher and redeem it on Pottery Barn’s Web site or in a Pottery Barn store.
Hogg gives his MBA program at Michigan State credit for helping him formulate his business model. In particular, a marketing professor influenced his thinking about how to display the cards on his site. The professor suggested that consumers are more likely to buy a product when given multiple choices, even if those choices sit next to competing brands. GiftZip.com is strictly a pass-through site, meaning that it doesn’t process transactions. Instead, when you click on a retailer’s emblem, you’re “passed through” to the retailer’s Web site where you place your order. GiftZip.com receives an affiliate fee for purchases that originate from its site. GiftZip.com’s value
LEARNING OBJECTIVES
After studying this chapter you should be ready to:
1. Explain entrepreneurship and discuss its importance.
2. Describe corporate entrepreneurship and its use in established firms.
3. Discuss three main reasons people decide to become entrepreneurs.
4. Identify four main characteristics of successful entrepreneurs.
5. Explain the five common myths regarding entrepreneurship.
6. Explain how entrepreneurial firms differ from salary-substitute and lifestyle firms.
7. Discuss the changing demographics of entrepreneurs in the United States.
8. Discuss the impact of entrepreneurial firms on economies and societies.
9. Identify ways in which large firms benefit from the presence of smaller entrepreneurial firms.
