DEDICATION
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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Library and Internet Research61
Other Techniques61
PARTNERING FOR SUCCESS: Want Help Fine-Tuning a Business Idea? Find a Mentor62
ENCOURAGING AND PROTECTING NEW IDEAS62
Establishing a Focal Point for Ideas63
Encouraging Creativity at the Firm Level63
Protecting Ideas from Being Lost or Stolen64
Chapter Summary65 | Key Terms65 | Review Questions65
Application Questions66 | You Be the VC 2.167 | You Be the VC 2.268 | CASE 2.169 | CASE 2.271
ENDNOTES73
CHAPTER 3 Feasibility Analysis 77
Opening Profile—MORPHOLOGY: The Value of Validating a Business Idea77
FEASIBILITY ANALYSIS79
WHAT WENT WRONG? eBay Drop-Off Stores: How Feasible Were They?80
Product/Service Feasibility Analysis81
SAVVY ENTREPRENEURIAL FIRM: How Learning from Customers
Caused a Successful Firm to Make a 180-Degree Turn on the Positioning of a Product87
Industry/Target Market Feasibility Analysis88
Organizational Feasibility Analysis91
PARTNERING FOR SUCCESS: Finding the Right Business Partner92
Financial Feasibility Analysis93
First Screen95
Chapter Summary96 | Key Terms97 | Review Questions97
Application Questions97 | You Be the VC 3.199 | You Be the VC 3.299 | CASE 3.1100 | CASE 3.2102
ENDNOTES105
Appendix 3.1106
Appendix 3.2108
CHAPTER 4 Writing a Business Plan111
Opening Profile—LINCOLN&LEXI: Proceeding on the Strength of a Winning Business Plan111
THE BUSINESS PLAN113
Reasons for Writing a Business Plan113
Who Reads the Business Plan—And What Are They Looking For?115
Guidelines for Writing a Business Plan116
OUTLINE OF THE BUSINESS PLAN119
Exploring Each Section of the Plan119
SAVVY ENTREPRENEURIAL FIRM: Know When to Hold Them, Know When to Fold Them120
PARTNERING FOR SUCCESS: Types of Partnerships That Are Common in Business Plans125
WHAT WENT WRONG? What StyleHop Learned About the Value ofPlanning the Hard Way132
PRESENTING THE BUSINESS PLAN TO INVESTORS133
The Oral Presentation of a Business Plan133
Questions and Feedback to Expect from Investors135
Chapter Summary135 | Key Terms136 | Review Questions136
Application Questions137 | You Be the VC 4.1138 | You Be the VC 4.2139 | CASE 4.1140 | CASE 4.2142
ENDNOTES145
CHAPTER 5 Industry and Competitor Analysis 147
Opening Profile—ELEMENT BARS: Occupying a Unique Position in a Difficult Industry—and Thriving147
INDUSTRY ANALYSIS149
Studying Industry Trends150
PARTNERING FOR SUCCESS: Three Ts That Are Important for Becoming Active in an Industry: Trade Associations, Trade Shows, and Trade Journals151
The Five Forces Model152
The Value of the Five Forces Model158
Industry Types and the Opportunities They Offer160
WHAT WENT WRONG? Eclipse Aviation: Sometimes an Industry Can’t Be Revitalized162
COMPETITOR ANALYSIS163
Identifying Competitors164
SAVVY ENTREPRENEURIAL FIRM: Thriving in a Crowded Industry by Creating Meaningful Value and Differentiation from Competitors165
Sources of Competitive Intelligence166
Completing a Competitive Analysis Grid167
Chapter Summary168 | Key Terms169 | Review Questions169
Application Questions170 | You Be the VC 5.1172 | You Be the VC 5.2172 | CASE 5.1173 | CASE 5.2175
ENDNOTES177
CHAPTER 6 Developing an Effective BusinessModel179
Opening Profile—STROOME: Working to Find a Viable Business Model for an Exciting New Web-Based Service for Editing and Remixing Video179
BUSINESS MODELS181
The Importance and Diversity of Business Models182
SAVVY ENTREPRENEURIAL FIRM: Three Industries, Three Business Model Innovators183
How Business Models Emerge186 Potential Fatal Flaws of Business Models187
COMPONENTS OF AN EFFECTIVE BUSINESS MODEL189
Core Strategy189
WHAT WENT WRONG? Joost: Why It's Important to Be Sensitive to All Aspects of Your Business Model190
Strategic Resources192
Partnership Network194
PARTNERING FOR SUCCESS: 99designs: Making Partnering with Freelancers the Essence of Its Disruptive Business Model196
Customer Interface197
Chapter Summary199 | Key Terms200 | Review Questions200
Application Questions200 | You Be the VC 6.1202 | You Be the VC 6.2202 | CASE 6.1203 | CASE 6.2206
ENDNOTES208
PART 3 Moving from an Idea to an Entrepreneurial Firm211
CHAPTER 7 Preparing the Proper Ethical and Legal Foundation213
Opening Profile—XPLOSAFE: Proceeding on a Firm Legal Foundation213
INITIAL ETHICAL AND LEGAL ISSUES FACING A NEW FIRM215
Establishing a Strong Ethical Culture for a Firm216
Choosing an Attorney for a Firm220
Drafting a Founders’ Agreement221
SAVVY ENTREPRENEURIAL FIRM: Vesting Ownership in Company Stock: A Sound Strategy for Start-Ups222
Avoiding Legal Disputes223
WHAT WENT WRONG? How Legal and Management Snafus Can Kill a Business224
PARTNERING FOR SUCCESS: Patagonia and Build-A-Bear Workshop: Picking Trustworthy Partners227
OBTAINING BUSINESS LICENSES AND PERMITS228
Business Licenses228
Business Permits228
Choosing a Form of Business Organization229
Sole Proprietorship230
Partnerships232
Corporations233
Limited Liability Company236
Chapter Summary237 | Key Terms238 | Review Questions238
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
CHAPTER 14 Strategies for Firm Growth 461
Opening Profile—PHONE HALO: Pivoting to Pursue New Strategies for Growth461
INTERNAL GROWTH STRATEGIES463
New Product Development464
SAVVY ENTREPRENEURIAL FIRM: SwitchFlops: How to Create Built-In Avenues for Future Growth465
Other Product-Related Strategies467
International Expansion470
EXTERNAL GROWTH STRATEGIES472
Mergers and Acquisitions474
WHAT WENT WRONG? Be Careful What You Wish For: How StumbleUpon’s Founder Sold His Company to eBay and Two Years Later Bought It Back Again476
Licensing477
Strategic Alliances and Joint Ventures479
PARTNERING FOR SUCCESS: Three Steps to Alliance Success480
Chapter Summary482 | Key Terms483 | Review Questions483
Application Questions484 | You Be the VC 14.1485 | You Be the VC 14.2486 | CASE 14.1487 | CASE 14.2489
ENDNOTES492
CHAPTER 15 Franchising495
Opening Profile—COLLEGE NANNIES & TUTORS: Franchising as a Form of Business Ownership and Growth495
WHAT IS FRANCHISING AND HOW DOES IT WORK?497
What Is Franchising?497
How Does Franchising Work?498
ESTABLISHING A FRANCHISE SYSTEM501
When to Franchise501
SAVVY ENTREPRENEURIAL FIRM: Wahoo’s Fish Taco: A Moderate-Growth Yet Highly Successful Franchise Organization502
Steps to Franchising a Business503
Selecting and Developing Effective Franchisees504
Advantages and Disadvantages of Establishing a Franchise System505
BUYING A FRANCHISE507
WHAT WENT WRONG? Trouble at Curves International508 Is Franchising Right for You?509
The Cost of a Franchise509
PARTNERING FOR SUCCESS: Using Co-Branding to Reduce Costs and Boost Sales512
Finding a Franchise513
Advantages and Disadvantages of Buying a Franchise513
Steps in Purchasing a Franchise514
Watch Out! Common Misconceptions About Franchising516
LEGAL ASPECTS OF THE FRANCHISE RELATIONSHIP517
Federal Rules and Regulations518
State Rules and Regulations520
To verify currency, thoroughness, and reader interest, we have made several important changes, as presented next, while preparing this fourth edition of our book:
Opening Profile Each chapter opens with a profile of an entrepreneurial venture that was started by one or more students while completing their university-level educational experience. All 15 Opening Profiles (one for each chapter) are new to this edition. These descriptions of real-life entrepreneurs demonstrate that many of us have the ability to be entrepreneurs even while enrolled as a college student. Each profile is specific to a chapter’s topic. We completed extensive interviews with each student entrepreneur(s) to obtain the required materials. While reading each profile, imagine yourself in the role of one or more of the entrepreneurs who launched a venture as a student.
Student Entrepreneurs’Insights At the side of each Opening Profile, wepresent entrepreneurs’ answers to a series of questions. In providing answers to these questions, the entrepreneurs who launched their venture while enrolled in school express their perspectives about various issues. An important benefit associated with thinking about these responses is that those reading this book today have opportunities to see that they, too, may indeed have the potential to launch an entrepreneurial venture quicker than originally thought.
Updated Features Almost every one of the “What Went Wrong?” “Savvy Entrepreneurial Firm,” “Partnering for Success,” and “You Be the VC” features are new to this edition. The very few features we did retain have been thoroughly updated. These features present you with contemporary issues facing today’s entrepreneurial ventures. The “You Be the VC” features, for example, allow readers to decide if the potential of a proposed entrepreneurial venture is sufficient to warrant funding.
New and Updated Cases Virtually all of the pairs of end-of-chapter cases are new to this edition. Those retained have been completely updated. Comprehensive in nature, we wrote these cases with the purpose of presenting readers with opportunities to use chapter-specific concepts to identify problems and propose solutions to situations facing actual entrepreneurial ventures. Questions appearing at the end of each case can be used to stimulate classroom discussions.
Updated References The amount of academic research examining entrepreneurship topics continues to grow. To provide you, our readers, with the most recent insights from the academic literature, we draw from newly published articles in important journals such as Strategic Entrepreneurship Journal, Entrepreneurship Theory and Practice, Journal of Business Venturing, and Academy of Management Journal. Similarly, we relied on the most current articles appearing in business publications such as TheWall Street Journal and Entrepreneur among others, to present you with examples of the actions being taken by today’s entrepreneurial ventures.
HOW IS THIS BOOK ORGANIZED?
To explain the entrepreneurial process and the way it typically unfolds, we divide our book into four parts and 15 chapters. The four parts of the entrepreneurial process model are:
Part 1: Decision to Become an Entrepreneur
Part 2: Developing Successful Business Ideas
Part 3: Moving from an Idea to an Entrepreneurial Firm
Part 4: Managing and Growing an Entrepreneurial Firm
We believe that this sequence will make your journey toward understanding the entrepreneurial process both enjoyable and productive. The model is shown above. The step in the model that corresponds to the chapter being introduced is highlighted to help you form a picture of where each chapter fits in the entrepreneurial process.
WHAT ARE SOME OTHER UNIQUE FEATURES OF THIS BOOK?
While looking through your book, we think you’ll find several unique features, as presented next, that will work to your benefit as a student of entrepreneurship and the entrepreneurial process.
UNIQUE FEATUREOFTHE BOOK EXPLANATION
Focus on opportunity recognition and feasibility analysis
What Went Wrong? boxed feature
We open your book with strong chapters on opportunity recognition and feasibility analysis. This is important, because opportunity recognition and feasibility analysis are key activities that must be completed early when investigating a new business idea.
Each chapter contains a boxed feature titled “What Went Wrong?” We use these features to explain the missteps of seemingly promising entrepreneurial firms. The purpose of these features, as you have no doubt already guessed, is to highlight the reality that things can go wrong when the fundamental concepts in the chapters aren’t carefully followed.
Partnering for Success boxed feature
Savvy Entrepreneurial Firm boxed feature
You Be the VC end-of-chapter features
A total of 30 original end-of-chapter cases
Each chapter contains a boxed feature titled “Partnering for Success.” The ability to partner effectively with other firms is becoming an increasingly important attribute for successful entrepreneurial ventures.
Each chapter contains a boxed feature titled “Savvy Entrepreneurial Firm.” These features illustrate the types ofbusiness practices that facilitate the success of entrepreneurial ventures. As such, these are practices you should strongly consider putting into play when you are using the entrepreneurial process.
Two features, titled “You Be the VC,” are provided at the end of each chapter. These features present a “pitch” for funding from an emerging entrepreneurial venture. The features are designed to stimulate classroom discussion by sparking debate on whether a particular venture should or shouldn’t receive funding. All the firms featured are real-life entrepreneurial start-ups. Thus, you’ll be talking about real—not hypothetical or fictitious—entrepreneurial ventures.
Two medium-length cases, written by the authors of the book, are featured at the end of each chapter. The cases are designed to stimulate classroom discussion between you and your professor and with your follow students for the purpose of illustrating the issues discussed in the chapter.
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
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