The Entrepreneurial Revolution Lesson 1 Understanding the Entrepreneurial Perspective in Individuals There are more entrepreneurs in the U.S. than any other country. Why? Understanding the Entrepreneurial Perspective in Individuals FASTTRAC PLANNINGTM did a survey: June 1995 through July 2000 A total of 4,026 aspiring entrepreneurs attended FastTrac Planning sessions. The following demographics show just who took this course and why. Understanding the Entrepreneurial Perspective in Individuals What kind of education do entrepreneurs have? Understanding the Entrepreneurial Perspective in Individuals What types of businesses do entrepreneurs start? Understanding the Entrepreneurial Perspective in Individuals Service firms are 30% of new firms, while 19% of new firms are in retail merchandising. That means 60% more service firms are started than retail merchandising firms. Why? Understanding the Entrepreneurial Perspective in Individuals What drives us to be entrepreneurs? Why do we start our own business? What motivates us? Understanding the Entrepreneurial Perspective in Individuals We average 2.2 jobs for part-timers and 2.8 full-time jobs. Those numbers may not look like much, but multiply them by millions of entrepreneurs, and you are looking at serious job creations. Entrepreneurs are creating jobs when the large companies are laying off and downsizing. Understanding the Entrepreneurial Perspective in Individuals What is the bottom line to all this? How are we doing? Understanding the Entrepreneurial Perspective in Individuals In 1999 a survey asked participants if their business’s revenue increased, decreased, or stayed the same from the previous year. The survey also asked the percentage change they experienced. The following graphs show the results for 1999 – 2000 participants only. Changes in Gross Sales Understanding the Entrepreneurial Perspective in Individuals So where did all this data come from? How geographically diversified were the participants? Understanding the Entrepreneurial Perspective in Individuals And that is who we are. Miscellaneous Lesson 1: Introduction to Small Business Why Most Small Firms Fail 1. They are under capitalized. 2. The owners do not understand marketing. 3. The owners do not know how to run a firm. I cannot guarantee you will succeed; I can and will reduce your odds of failure. What is a Small Business? A small business is often self- funded, built around the owner’s skills, and is intended to meet personal goals of the founder employing 50 to 100 persons. The most I ever had was 8 people. Your people problems rise geometrically as you add more people. Only hire additional people if you will lose money by not doing so. Why Is Small Business Important? Small business is the growth engine of the U.S. economy. Small firms provide most new employment opportunities. Large businesses are employing a smaller percentage of workforce today due to downsizing. Small firms are more flexible and can respond to change quickly. Why? Did You Know? In 2002 there were approximately 22.9 million small firms in the US. Small businesses account for 52% of the private sector output in 1999. Small businesses represent 97% of all US exporters! Did You Know? Politicians live and die (are elected or not) based almost entirely on job creation in their constituency. We generate new jobs: Approximately 75% of all net new jobs are added by small business. Small firms represent 99.7% of all employers. Small firms employ 50.1% of the private work force. A Brief History of Small Business in the United States Until the mid-1880s, almost all firms in the US were small businesses. The US was mostly agriculture-based. Following World War II, 1945, small firms as a percentage of the economy began to decline replaced by large multinationals. By the early 1980s large multinational firms began to decline opening new opportunities for small firms. Today, almost all employment growth in the US is from small firms. Some Common Motivations for Small Business People The desire to be your own boss. Potential for significant personal rewards- both financial and non- financial. Two thirds of the millionaires in the US are self-employed even though they make up only 20% of the work force. How Does Society Benefit From Small Business? Small firms may have the economic potential to turn around historically depressed areas. How? Small firms provide opportunities for people disenchanted with corporate life or who feel their promotion paths are small or blocked in larger companies. “A lot of new entrepreneurs come from corporate downsizing.” What does this mean? Small Business Worldwide International agencies and local governments encourage and support small businesses. Why? Globally, small business has a positive impact on economies. How? The rate of small business startups is increasing worldwide. Characteristics of Small Business Employees and Owners Small firms employed a higher percentage of workers under age 25 and workers aged 65 and over than did large firms in 1996. Why younger? Why older? Why hire older people? Lesson questions: 1. What types of small businesses interest you? 2. What aspects of those firms are appealing to you as a small business founder? • The flexibility of a small business so you can spend more time with the family? • To be your own boss? • Money? 3. Do you see yourself as a small business operator in the next five years? Economies of Scale -1 Large firms have the ability to achieve economies of scale because they can do some things more efficiently due to their large operating size. Associated Grocers of Arizona (AG) was able to buy train freight carloads of suntan lotion in the off season at half the cost that a small grocery store could buy the same product. AG could buy an entire carload and save on shipping costs. Economies of Scale -2 AG buys 10,000 bottles of Western Valley Suntan Lotion costing $1.25 per bottle. Shipping Costs for a carload of these from Chicago to Phoenix was $950 or 9.5 cents per bottle. This means the total cost to AG is $1.345 per bottle. Economies of Scale -3 Joe’s Hometown Groceries in Phoenix does not need 10,000 bottles of suntan lotion and is not a customer of AG. Joe buys 48 bottles from the manufacturer. We will assume his price is only 10% higher, so he pays $1.375 per bottle. They arrive via Yellow Freight for a shipping cost of $60 or $1.25 per bottle This brings the total cost per bottle to Joe’s of $2.625 per bottle, or double AG’s cost. Economies of Scale - 4 How do small firms survive? Using the example of AG vs. Joe’s Hometown Groceries: How do small firms survive against the competition of large firms? Clearly some do not. But some do. Specifically, why have stores like Wal-Mart, Costco, etc. swept all their competition away? Are they fair? Small Business in China -1 Today private entrepreneurs in China are still a small part of the economy. There has been a rapid growth in international joint ventures in the country. The vast majority of people still work for entities associated with the government. Why? What kind of government does China have? All publicly listed companies in the country have very high levels of government ownerships even though they have publicly traded stock. Small Business in China -2 China continues to be a communist country with capitalist characteristics. What does that mean? Private entrepreneurs still do not have legitimacy. Instead they are seen as potentially taking capital and sales away from the government- related businesses. This is particularly true for those private businesses that grow very large. Small Business in China -3 This absence of government support combined with the lack of a well- established legal system results in many special, taxes, tariffs, and charges being made on private entrepreneurs by officials that are corrupt. Here we see the value of honest legal system? Venture Capital Venture Capitalists (VCs) - 1 Partnerships of wealthy persons and institutional investors such as insurance companies. Generally individuals must have in excess of $1 million of cash to invest in these private equity funds. VCs make equity investments in small firms that have the potential for fast growth. (VCs) -2 VC firms’ stock is not publicly traded since the number of investors is small. The SEC does not get involved because the VCs are considered qualified or sophisticated investors VCs are not good source for new, small businesses. Why? The National Venture Capital website provides an excellent summary of the venture capitalist market and how it works: http://www.nvca.org/def.html . Angel Capitalists -1 Wealthy local business people and investors who may be external sources of equity funding. I had one, and he was a wonderful person. Invest in businesses in their specific geographic or business area where VCs utilize a much wider geographic target area. Invest in a range of different types of businesses whereas VCs typically invest in a single type of business or single industry – their specialty or area of expertise. Angel Capitalists -2 Angles’ expected returns are generally less rigorous than those desired by VCs, however they still focus on higher risk/higher return businesses. They may invest in “green” businesses or in firms who try to alleviate poverty or teach computer skills to ghetto children. That’s it for lesson 1 Introduction to Small Business.