Making Good Choices Success is a function not only of personal approaches but also of making good choices about the business you start. Figure 7.2 presents a model for conceptualizing entrepreneurial ventures and making the best possible choices. It depicts ventures along two dimensions: innovation and risk. The new venture may involve high or low levels of innovation or the creation of something new and differ- ent. It can also be characterized by low or high risk. Risk refers primarily to the prob- ability of major financial loss. But it also is more than that; it is psychological risk as perceived by the entrepreneur, including risk to reputation and ego. 60
The upper-left quadrant, high innovation/low risk, depicts ventures of truly novel ideas with little risk. As examples, the inventors of Lego building blocks and Velcro fasteners could build their products by hand at little expense. A pioneering product idea from Procter & Gamble might fit here if there are no current competitors and because, for a company of that size, the financial risks of new product investments can seem relatively small.
In the upper-right quadrant, high innovation/high risk, novel product ideas are accompanied by high risk because the financial investments are high and the competi- tion is great. A new drug or a new automobile would likely fall into this category.
FIGURE 7.2
Entrepreneurial Strategy Matrix
High innovation Low risk Innovation
(creating a unique and different product/service)
Low High
Low High
Risk
(probability of major loss) Low innovation
Low risk
High innovation High risk
Low innovation High risk
SOURCE: Reprinted from Business Horizons, May–June 1997, Sonfield and Lussier, “Entrepreneurial Strategy Matrix: A Model of New and Ongoing Ventures,” Copyright © 1997, with permission from Elsevier.
Most small business ventures are in the low innovation/high risk cell (lower right).
They are fairly conventional entries in well-established fields. New restaurants, retail shops, and commercial outfits involve high investment for the small business entre- preneur and face direct competition from similar businesses. Finally, the low inno- vation/low risk category includes ventures that require minimal investment and/or face minimal competition for strong market demand. Examples are some service busi- nesses having low start-up costs and those involving entry into small towns if there is no competitor and demand is adequate.
How is this matrix useful? It helps entrepreneurs think about their ventures and decide whether they suit their particular objectives. It also helps identify effective and ineffective strategies. You might find one cell more appealing than others. The lower-left cell is likely to have relatively low payoffs but to provide more security.
The higher risk/return trade-offs are in other cells, especially the upper right. So you might place your new venture idea in the appropriate cell and determine whether that cell is the one in which you would prefer to operate. If it is, the venture is one that perhaps should be pursued, pending fuller analysis. If it is not, you can reject the idea or take steps to move it toward a different cell.
The matrix also can help entrepreneurs remember a useful point: successful com- panies do not always require a cutting-edge technology or an exciting new product.
Even companies offering the most mundane products—the type that might reside in the lower-left cell—can gain competitive advantage by doing basic things differently from and better than competitors.
In Practice
For Max Arndt, the choice of a business idea was a requirement for his entrepreneurship class at the University of Minnesota. Pondering what problems of modern society have yet to be solved, it occurred to Arndt that many people hate touching the door handle when they leave a public restroom. How else could they make a sanitary exit? Arndt figured you would need to come up with some kind of metal piece that could be bolted to the bottom of the inside of the door, and that way, you could pull the door open with the toe of your shoe.
That thinking gave birth to the Toepener—basically a metal plate with an L-shaped hook for pulling the door open. Arndt’s class loved the idea and voted to make it the one they would back. The school provided a $15,000 loan, and Arndt led his team in setting up the business, with the goal of repaying the loan and earning a profit by the end of the semester.
They built a website, set the price at $49.95, and contracted with a manufacturer. Soon they had hundreds of orders and were on track to meet their goals. The editors of Inc. magazine also fell in love with the idea, naming the Toepener one of the coolest college start-ups. 61 • Would you rate this business idea as high or low on innovation? As high or low on risk?
Success and Failure
S uccess or failure lies ahead for entrepreneurs starting their own companies as well as for those starting new businesses within bigger corporations. Entrepreneurs succeed or fail in private, public, and not-for-profit sectors; in nations at all stages of develop- ment; and in all nations, regardless of their politics. 62
Estimated failure rates for start-ups vary. Most indicate that failure is more the rule than the exception. The failure rate is high for certain businesses such as restaurants and lower for successful franchises. Start-ups have at least two major liabilities: new- ness and smallness. 63 New companies are relatively unknown and need to learn how to be better than established competitors at something that customers value. Regard- ing smallness, the odds of surviving improve if the venture reaches a critical mass
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of at least 10 or 20 people, has revenues of $2 million or $3 million, and is pursuing opportunities with growth potential. 64
To understand further the factors that influence suc- cess and failure, we’ll consider risk, the economic envi- ronment, various management-related hazards, and initial public stock offerings (IPOs).
Risk You learned about risk in Chapter 3. It’s a given:
starting a new business is risky. Entrepreneurs with plenty of business experience are especially aware of this.
When Chris McGill was evaluating his idea for Mixx.
com , a news website that could be personalized based on recommendations by users, he was USA Today ’s vice president of strategy. To make Mixx succeed, McGill knew he would be leaving a well-paying job for an uncer- tain future in which he had to line up financing and hire talented people in a turbulent business environment.
But McGill also concluded that his experience at USA Today and prior management experience with Yahoo News gave him the knowledge and connections for a success- ful Internet business. 65 He sold Mixx.com in 2011 to UberMedia.
Successful entrepreneurs are realistic about risk.
They anticipate difficulties and cushion their business to help it weather setbacks. In downtown Seattle, entre- preneurs Ben and Cindi Raykovich saw a risk when a major construction project began disrupting traffic around their store, Sound Sports. The Raykoviches had built their business around serving running enthusi- asts who worked downtown and would stop by on their
lunch hour or after work. Concerned that the construction would drive away so much business that the store couldn’t survive, they opened a second location in the nearby community of Poulsbo. If they needed to close the first store, they could continue to build their business in Poulsbo. Ben Raykovich is hardly cavalier about the situation: “My life is invested in this business. We need to spread out the risk.” 66
The Role of the Economic Environment Entrepreneurial activity stems from the economic environment as well as the behavior of individuals. For example, money is a critical resource for all new businesses. Increases in the money supply and the supply of bank loans, real economic growth, and improved stock market per- formance lead to both improved prospects and
increased sources of capital. In turn, the pros- pects and the capital increase the rate of business formation. Under favorable conditions, many aspiring entrepreneurs find early success. But eco-
nomic cycles can quickly change favorable conditions into downturns. To succeed, entrepreneurs must have the foresight and talent to survive when the environment becomes more hostile.
Although good economic times may make it easier to start a company and to survive, bad times can offer an opportunity to expand. Ken Hendricks of ABC Sup- ply found a business opportunity in a grim economic situation: a serious downturn in the manufacturing economy of the Midwest contributed to the shutdown of his town’s largest employer, the Beloit Corporation. Hendricks purchased the com- pany’s buildings and lured a diverse group of new employers to town despite the
Economic cycles can quickly change favorable conditions into downturns.
Richard Foos (left), Bob Emmer (center), and Garson Foos are successful entrepreneurs due to their creativity, innovation, and knowledge of their target customers’ desires. They are shown here with a circa 1966–1967 Batmobile children’s arcade ride in their Shout! Factory headquarters in Los Angeles. As CEO of the Shout! Factory, Richard Foos runs an emporium filled with nostalgia- type collectibles.
economic challenges. In fact, Hendricks turned around struggling suppliers that ABC acquired. 67 Another silver lining in difficult economic times is that it’s easier to recruit talent.
Business Incubators The need to provide a nurturing environment for fledgling enterprises led to the creation of business incubators. Business incubators , often located in industrial parks or abandoned factories, are protected environments for new, small businesses. Incubators offer benefits such as low rents and shared costs.
Shared staff costs, such as for receptionists and secretaries, avoid the expense of a full-time employee but still provide convenient access to services. The staff manager is usually an experienced businessperson or consultant who advises the new business owners. Incubators often are associated with universities, which provide technical and business services for the new companies.
The heyday of business incubators came in the 1990s, when around 700 of them were financing start-ups, mainly emphasizing technology. Eight out of 10 shut down following the collapse of the Internet bubble, but the idea of nurturing new businesses persists. Naval Ravikant, for example, is developing a company tentatively named Hit Forge, which resembles the dot-com incubators. Hit Forge hired four engineers with experience in launching successful Internet concepts. The engineers have wide lati- tude to try ideas, but they work under strict deadlines. They must go from concept to product within 90 days, and any enterprises that aren’t growing after a year will be terminated. Unlike the older-style incubator, Hit Forge lets engineers work from the locations of their choice, and the engineers retain half ownership in the ventures they develop. Also, whereas incubators in the 1990s might have spent $2 million develop- ing an idea, today’s launches might cost just $50,000. 68
Business incubators hatch new businesses. Once a young business begins gaining a foothold and establishing itself, business accelerators can provide additional support and advice. These still-young firms are more mature but still in their formative years, and they now face the challenges of sustaining growth and achieving their full market potential. 69
Common Management Challenges As an entrepreneur, you are likely to face several common challenges that you should understand before you face them and then manage effectively when the time comes. We next discuss several such challenges.
You Might Not Enjoy It Some managers and employees can specialize in what they love, whether it’s selling or accounting. But entrepreneurs usually have to do it all, at least in the beginning. If you love product design, you also have to sell what you invent. If you love marketing, get ready to manage the money too. This last chal- lenge was almost a stumbling block for Elizabeth Busch, Anne Frey-Mott, and Beckie Jankiewicz when they launched The Event Studio to run business conferences for their clients. All three women had experience with some aspect of running conferences, but when they started their company, they didn’t fully think out all the accounting deci- sions they would need for measuring their income and cash flow. With some practical advice, they learned some basic accounting lessons that helped them avoid tax troubles later on. 70 If they hadn’t been willing to learn new skills, entrepreneurship might not have been the right career path for them.
Survival Is Difficult Companies without much of a track record tend to have more trouble lining up lenders, investors, and customers. When economic conditions cool or competition heats up, a small start-up serving a niche market may have limited options for survival. Failure can be devastating.
Founders of a start-up must make key decisions in so many areas of business that mistakes are a potentially devastating risk. Several months after starting Zipcar, a car- sharing service, founder Robin Chase evaluated the early financial data and discovered business incubators
Protected environments for new, small businesses.
business accelerator An organization that assists young firms in achieving faster and sustainable growth as they move into the next phase of their development.
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that the company had made a mistake in setting prices. The daily rental fees had been set too low to make the company profitable. Chase concluded that the only way she could keep Zipcar in business was to own up to her error, disclose it to her customers, and explain that the rate would be rising by 25 percent. Only two customers com- plained, and Zipcar grew into a multimillion-dollar business. 71
Growth Creates New Challenges Just one in three Inc. 500 companies keeps grow- ing fast enough to make this list of fastest-growing companies two years running. The reason: They are facing bigger challenges, competing with bigger firms, stretching the founders’ capacities, and probably burning cash. Consultant Doug Tatum calls this phase of a company’s growth “no man’s land.” 72 It’s a difficult transition.
In the beginning, entrepreneurs keep their business afloat with dogged determina- tion to win customers and keep them happy. They work long hours at low pay, deliver great service, and get good word-of-mouth advertising, and their business grows.