Starting Your Own Business

What Is an Entrepreneur?

An entrepreneur is a person who seeks a profitable opportunity and takes the necessary risks to set up and operate a business. The history of business is full of examples of entrepreneurs who through their innovation and hard work created very successful companies. From John Deere (Deere and Company) to Thomas Edison (General Electric), Henry Ford (Ford Motor Company), Sam Walton (Walmart), and Steve Jobs (Apple), these entrepreneurs' visions for the future were the driving force behind revolutions in farming, manufacturing, retailing, and computer technology. For example, Sam Walton wasn't satisfied owning just one successful Ben Franklin franchise, so he purchased others. And when that wasn't enough, he started his own stores and grew them. Entrepreneurs like Walton combine their ideas and drive with money, employees, and other resources to create a business that fills a market need. That entrepreneurial role can make something significant out of a small beginning. Walmart, the company that Sam Walton started, recently reported net sales in excess of $411 billion.²

Entrepreneurs differ from many small-business owners. Although many small-business owners possess the same drive, creative energy, and desire to succeed, what makes entrepreneurs different is that one of their major goals is expansion and growth. By contrast, small-business owners without a strong entrepreneurial spirit may prefer to keep their businesses small. For them, maintaining a small, profitable enterprise may be more important than growth.

Entrepreneurs also differ from managers. Managers are employees of a firm who direct the efforts of others to achieve the organization's goals. Entrepreneurs may also perform a managerial role, but their overriding responsibility is to use the resources of their organizations to accomplish their goals. Those resources may include:

• employees
• money
• equipment
• facilities

Studies have identified certain personality traits and behaviors common to entrepreneurs that differ from those required for managerial success. One of these traits is the willingness to assume the risks involved in starting a new venture. Others want a challenge or a different quality of life. And still others want to pursue their vision. Regardless of their motivation, entrepreneurs are a breed apart from traditional business managers, for they are the ones whose drive, energy, and creativity create new jobs, new businesses, and even whole new industries. The characteristics of successful entrepreneurs are examined in detail later in this chapter.

The Environment for Entrepreneurs

When considering a new venture, entrepreneurs are wise to consider broader socioeconomic trends as well as those connected with their particular business. Several ongoing trends that support and expand the opportunities for entrepreneurs are globalization, education, and information technology. Each of these factors is discussed in the following sections.

GLOBALIZATION

The next time you look into your closet, reach for your smart phone, or bend down to tie your shoes, you are likely experiencing one of the results of globalization: low-cost, high-quality products produced in developing nations. These products and a host of others are often created by companies founded by entrepreneurs. “With $7,500 and guided by a belief that electronics products would be an integral part of everyday life in every office and in every home, Terry Gou founded Hon Hai Precision Industry Company Ltd, the anchor company of Foxconn Technology Group, in 1974.”³ Foxconn is just one example of the increasing globalization of manufacturing. Gou was able to take advantage of this trend, combining technical excellence with low-cost labor to create one of the world's largest electronics manufacturers. Foxconn's customer list includes many well-known consumer brands, including Apple.⁴

EDUCATION

You don't have to major in business to become an entrepreneur, but students who do major in entrepreneurship or take entrepreneurship courses are three times more likely to start their own business or help someone else start one.⁵ The past two decades have brought tremendous growth in the number of educational opportunities for would-be entrepreneurs. Today, more than 100 U.S. universities offer full-fledged majors in entrepreneurship, dozens of others offer an emphasis in entrepreneurship, and hundreds more offer one or two courses in how to start a business. In fact, you don't have to wait for graduation to develop your first start-up. FedEx, Facebook, Napster, and Google were all conceived by college students. And who would have thought that student housing was the best place to start a company? Michael Dell did exactly that, turning his University of Texas dorm room into the first company headquarters for Dell Computer.⁶ Learning about business is important for entrepreneurs, but the opportunity to put your ideas into practice is—as they say in the MasterCard commercials—“priceless.”

INFORMATION TECHNOLOGY

The explosion in information technology (IT) has provided one of the biggest boosts for entrepreneurs. As computer and communications technologies have merged and dropped dramatically in cost, entrepreneurs have gained tools that help them compete with large companies. IT helps entrepreneurs

• work quickly and efficiently
• provide immediate and attentive customer service
• increase sales
• project professional images

In fact, technology has leveled the playing field to the point that, with the use of smart phones and other wireless devices, a dorm room innovator can compete with a much larger firm.

Social networking has further transformed the business environment for entrepreneurs. Mark Zuckerberg's entrepreneurial venture Facebook opened up vast new opportunities for other entrepreneurs. According to a recent study, more than 90 percent of successful companies now use at least one social media tool. One entrepreneur who embraces the full impact of social media on his business is Adam Kidron, who runs an upscale health-conscious burger joint in New York City, called 4food. Customers “design” their own burger on their smart phone or home computer or on one of the iPads in the restaurant. Then they save the information to 4food's database. They can post their creation on Twitter or Facebook or create their own YouTube commercial.⁷

The Process of Starting a New Venture

The examples of entrepreneurs presented so far have introduced many different types of businesses. This section discusses the process of choosing an idea for a new venture and transforming the idea into a working business.

SELECTING A BUSINESS IDEA

In choosing an idea for your business, the two most important considerations are (1) finding something you are passionate about and (2) determining whether your idea can satisfy a need in the marketplace. People willingly work hard doing something they love, and the experience will bring personal fulfillment. Success also depends on customers, so would-be entrepreneurs must also be sure that the idea they choose has interest in the marketplace. The most successful entrepreneurs tend to operate in industries in which a great deal of change is taking place and in which customers have difficulty pinpointing their precise needs. These industries allow entrepreneurs to capitalize on their strengths (such as creativity, hard work, and vision) despite market uncertainty.

Nevertheless, examples of outstanding entrepreneurial success occur in every industry. Whether you want to build a business based on your grandmother's cookie recipes or know that you have a better idea for tax-preparation software, you are more likely to succeed if you ask yourself the right questions from the beginning.

Consider the following guidelines as you think about your business ideas:

• List your interests and abilities. Include your values and beliefs, your goals and dreams, things you like and dislike doing, and your job experiences.
• Make another list of the types of businesses that match your interests and abilities.
• Read newspapers and business and consumer magazines to learn about demographic and economic trends that identify future needs for products that no one yet offers.
• Carefully evaluate existing goods and services, looking for ways you can improve them.
• Decide on a business that matches what you want and offers profit potential.
• Conduct marketing research to determine whether your business idea will attract enough customers to earn a profit.
• Learn as much as you can about your industry, your goods or service, and your competitors.
• Read surveys that project growth in various industries.

Turning a good idea into a good business, Turning Technologies developed the audience-response wireless keypad systems used on TV game shows to register opinions or answer questions. Beyond TV game shows, teachers from kindergarten through college also use Turning's audience-response technology. Instructors can ask questions in class using other programs; have students key in answers—anonymously or not—using their remotes; and instantly collate the responses to see how many students answered correctly. Says a school official about applications of the Turning program, “You're really only limited by your creativity.”⁸

Government agencies and nonprofit organizations use Turning Technologies' systems for their training programs. Turning has already been called the fastest-growing privately held software company in the United States. The firm boasts more than 6,500 clients, and more than a million people use its audience-response products.

CREATING A BUSINESS PLAN

Large or small, every business needs a plan in order to succeed. While there are tales of firms launched from an idea scribbled on a napkin at a restaurant or sketched out on graph paper on a college campus, the idea must be backed by a solid plan in order to become reality. A business plan is a written document that provides an orderly statement of a company's goals, the methods by which it intends to achieve these goals, and the standards by which it will measure its achievements. The business plan is often the document that secures financing for a firm and creates a framework for the organization.

In the past, many entrepreneurs launched their ventures without creating formal business plans. Although planning is an integral part of managing in contemporary business, what often defines entrepreneurs is the ability to seize opportunities as they arise and change course as necessary. Flexibility seems to be the key to business start-ups, especially in rapidly changing markets. However, due to the inherent risks of starting a business, it has become apparent that at least some planning is not only advisable but necessary, particularly if an entrepreneur is seeking funds from outside sources. Business plans give the organization a sense of purpose. They identify the firm's mission and goals. They create measurable standards and outline a strategy for reaching company objectives.

THE BUSINESS PLAN

A typical business plan includes the following sections:

• An executive summary that briefly answers the who, what, where, when, why, and how questions for the firm.
• The company's mission and the vision. For an example of a firm's mission statement, visit a business's Web site.
• An outline of what makes the company unique. Why start a business that's just like hundreds of others? An effective business plan describes what distinguishes the firm and its products from the rest of the pack. TOMS Shoes illustrates a unique business model with its “one-for-one” donation program.
• Customers. A business plan identifies the company's prospective customers and how it will serve their needs.
• Competition. A business plan addresses the firm's existing and potential competitors as legitimate entities, with a strategy for creating superior or unique offerings. Studying the competition can provide valuable information about what works and what doesn't in the marketplace.
• Financial evaluation of the industry and market conditions. This knowledge helps develop a credible financial forecast and budget.
• Assessment of the risks. Every business undertaking involves risks. A solid business plan acknowledges these and outlines a strategy for dealing with them.
• Résumés of principals—especially in plans written to obtain financing.

Whether a firm's intention is to revolutionize an entire industry on a global scale or improve the lives of children by providing them with shoes, the business plan is a major factor in its success.

Financing Your Venture

A key issue in any business plan is financing. Requirements for seed capital, the funds used to launch a company, depend on the nature of the business. Seed capital can range as high as several million—say, for the purchase of a McDonald's franchise in a lucrative area—or as low as $1,000 for Web site design. Many entrepreneurs rely on personal savings or loans from business associates, family members, or even friends for start-up funds. TABLE 6.1 lists the common sources of start-up capital.

SELF-FINANCING

Financing a venture using your own funds has many advantages over other methods. Since the funds belong to you as the entrepreneur, they can be used without restrictions or conditions. There also is no need to repay the funds, nor must you give up ownership of the venture in exchange for funding. At the very earliest stages of a new venture, entrepreneurs should use their own funds to advance their ideas and business processes. Not only does it help validate the entrepreneur's ideas, but it demonstrates commitment to the project and shows prospective investors that the entrepreneur has “skin in the game.” Spending their own money also forces entrepreneurs to be more creative in the use of the funds.

However, at some point the cash demands of a growing business may exceed an entrepreneur's resources, and he or she will have to seek out additional sources of funds. Other People's Money (OPM) is the general term for the funds business people raise from others. By using OPM, entrepreneurs can leverage their own investment, allowing their businesses to grow faster while sharing financial risks with others. Outside funds can be raised in a number of ways including traditional debt financing, equity financing, and more recently crowd funding. The following sections detail each of these methods.

DEBT FINANCING

When entrepreneurs use debt financing, they borrow money that they must repay. Loans from banks, finance companies, credit-card companies, and family or friends are all sources of debt financing. Although some entrepreneurs charge business expenses to personal credit cards because they are relatively easy to obtain, high interest rates make this source of funding expensive.

Many banks turn down requests for loans to fund start-ups, fearful of the high risk such ventures entail. This has been particularly true over the last several years. Only a small percentage of startups raise seed capital through bank loans, although some new firms can get Small Business Administration (SBA)–backed loans, as discussed in Chapter 5. Applying for a bank loan requires careful preparation. Bank loan officers want to see a business plan and will evaluate the entrepreneur's credit history. Because a start-up has not yet established a business credit history, banks often base lending decisions on evaluations of entrepreneurs' personal credit histories. Banks are more willing to make loans to entrepreneurs who have been in business for a while, show a profit on rising revenues, and need funds to finance expansion. Some entrepreneurs find that local community banks are more interested in business than are major national banks.

EQUITY FINANCING

To secure equity financing, entrepreneurs exchange a share of ownership in their company for money supplied by one or more investors. Entrepreneurs invest their own money along with funds supplied by other people and firms that become co-owners of the start-ups. An entrepreneur does not have to repay equity funds. Instead, investors share in the success of the business. Sources of equity financing include family and friends, business partners, venture capital firms, and private investors.

A venture capitalist is a business organization or a group of private individuals that invests in early-stage, high-potential, and growth companies. Venture capitalists often back companies in high-technology industries such as biotechnology. FIGURE 6.1 details venture capital investment by sector during a recent period. In exchange for taking a risk with their own funds, these investors expect high rates of return, along with a stake in the company. Typical terms for accepting venture capital include agreement on how much the company is worth, how much stock both the investors and the founders will retain, control of the company's board, payment of dividends, and the period of time during which the founders are prohibited from seeking further investors. When investing, venture capitalists look for a combination of extremely rare qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team.

An angel investor, a wealthy individual who invests money directly in new ventures in exchange for equity, represents another source of investment capital for start-up firms. In contrast to venture capitalists, angels focus primarily on new ventures and, because most entrepreneurs have trouble finding wealthy private investors, angel networks are formed to match business angels with start-ups in need of capital. One such network of angel investors is Keiretsu Forum, an association with worldwide affiliates.⁹

NEW FINANCING METHODS

In addition to more traditional funding sources, a number of interesting new ways exist to raise funds for entrepreneurial ventures. The Internet has made these methods possible by crowd funding, effectively linking entrepreneurs directly with their supporters.

A growing list of Web-based businesses has been established specifically to facilitate these exchanges, which include direct donations, patronage, and advanced orders.¹⁰ For many years, philanthropic groups have raised money for their causes by soliciting online donations. Social entrepreneurs may use this approach to help raise money for victims of natural disasters. Alternatively, a musical group or other artist may use a Web-based appeal to raise money to pursue their careers. This approach is a replay of the patronage model from centuries ago, when wealthy individuals would pay an artist to create art for them. Much of the great art and music of the Renaissance was produced this way. Entrepreneurs can also use crowd-funding sites to obtain pre-orders for their products. In this approach, an individual or group will make an appeal for funds to start or expand their business in exchange for their product. For example, entrepreneur Britta Riley used Kickstarter to raise $257,307 from 1,577 backers to expand her hydroponic systems business, called Windowfarms.¹¹

GOVERNMENT SUPPORT FOR NEW VENTURES

Federal, state, and local governments support new ventures in a number of ways, as discussed in Chapter 5. Through the SBA, state and local agencies offer entrepreneurs information, resources, and sometimes access to financing. Some community agencies interested in encouraging business development have implemented a concept called a business incubator to provide low-cost shared business facilities to small start-up ventures. A typical incubator might section-off space in an abandoned plant and rent it to various small firms. Tenants often share clerical staff and other business services. The objective is that, after a few months or years, the fledgling business will be ready to move out and operate on its own. More than 1,400 business incubator programs operate in the United States, with about 7,000 worldwide. Ninety-four percent are run by not-for-profit organizations focused on economic development. Nearly half of all incubators focus on new technology businesses, and more than half operate in urban areas.¹²

Another way to encourage entrepreneurship is through enterprise zones, specific geographic areas designated for economic revitalization. Enterprise zones encourage investment, often in distressed areas, by offering tax advantages and incentives to businesses locating within the boundaries of the zone. The state of Florida, for example, has 56 enterprise zones and allows a business located within urban zones to take tax credits for 20 or 30 percent of wages paid to new employees who reside within the urban enterprise zone. Colorado has 16 zones, and Ohio has over 360 active zones.

The government may also support new ventures through direct procurement of goods and services. The Commerce Business Daily is a U.S. government publication that lists opportunities for entrepreneurs to obtain government contracts. Many government agencies such as NASA, the Department of Defense (DOD), and the Department of Energy (DOE) have active research programs and support entrepreneurs and business organizations working in their areas of responsibility.¹³

Reasons to Choose Entrepreneurship

People choose to become entrepreneurs for many reasons. Some are motivated by dissatisfaction with the traditional work world—they want a more flexible schedule or freedom to make all the decisions. Others launch businesses to fill a gap in goods or services that they could use themselves. Still others start their own firms out of financial necessity. Regardless of the particular motivation, entrepreneurs seem to share the following characteristics.

PURSUING YOUR VISION

Entrepreneurs generally begin with a vision—an overall idea for how to make their business idea a success. And they pursue this vision with relentless passion. The late Steve Jobs's vision helped Apple become the world's largest marketer of MP3 players, smart phones, and tablet computers. Even after his death, Jobs's vision continues to guide the company and provides clear direction for employees as Apple grows, adapts, and prospers in an industry characterized by tremendous technological change. Velcro was created by a hunter who noticed that burrs stuck to his socks as he walked through the wilderness. However, just making a discovery is not enough; entrepreneurs must know how to turn their vision into a profitable business. Although Sir Alexander Fleming discovered penicillin, he was unable to turn his discovery into a cure for bacterial infections. It took others to develop the process to produce usable quantities of the drug.¹⁴

BEING YOUR OWN BOSS

The freedom to make all the decisions—being your own boss—is one of the biggest lures of entrepreneurship. After 20 years of working in the fitness industry, Peter Taunton wanted out of the big-box health club scene, but he wasn't finished with fitness. He decided to create a different kind of gym, one for average people who prefer to work out without wearing Spandex shorts or being bombarded by loud music and big-screen TVs. Taunton founded Taunton's Snap Fitness—small, neighborhood-oriented fitness clubs based on affordability, convenience, and cleanliness. Now, the nearly 2,000 franchised Snap Fitness clubs are smaller than the average gym but are open 24 hours a day. They feature up-to-date cardio and training equipment, but that's about all. There are no child-care facilities or smoothie bars, no pools or racquetball courts. What there is, however, is state-of-the-art equipment and employees who are willing to help each Snap Fitness member achieve their fitness goals.¹⁵

ACHIEVING FINANCIAL SUCCESS

Entrepreneurs are wealth creators. Many start their ventures with the specific goal of becoming rich—or at least financially successful. Often they believe they have an idea for a superior product and they want to be the first to bring it to market, reaping the financial rewards as a result. Entrepreneurs believe they won't achieve their greatest success by working for someone else, and they're generally right. Of course, the downside is that, when they fail, they don't have the cushion of employment.

John Vechey, with Jason Kapalka and Brian Fiete, founded PopCap and developed such popular games as Bejeweled and Plants vs. Zombies on the premise that online games should be simple and fun for everyone. As Vechey says, “PopCap Games began with just a couple of college guys who didn't know how to run a business.” However, it turns out that they did know how to run a business after all. In 2011, Electronic Arts bought PopCap in a deal worth $750 million.¹⁶

Categories of Entrepreneurs

Entrepreneurs apply their talents in different situations. These differences can be classified into distinct categories:

• classic entrepreneurs
• serial entrepreneurs
• social entrepreneurs

A classic entrepreneur identifies business opportunities and allocates available resources to tap those markets. Dana Hood is a classic entrepreneur. She recognized that dog owners want special attention for their pets when they leave those animals in the care of others. She also knew that pet owners spent $3.4 billion for boarding and daycare centers during a recent year. So, when she founded For the Love of Dogs, a canine daycare center, she made certain that her services stood out from the average kennel. Hood's firm offers customized services such as grooming and anesthesia-free teeth-cleaning, a treadmill, swimming pools, and water misters to cool off customers' pets during hot weather. In addition, pet owners can purchase high-end organic foods and treats, beds, toys, and other retail goods.¹⁷

While a classic entrepreneur starts a new company by identifying a business opportunity and allocating resources to tap a new market, a serial entrepreneur starts one business, runs it, and then starts and runs additional businesses in succession. Elon Musk co-founded the electronic payment firm PayPal and the spacecraft and launch vehicle company SpaceX. He was also chairman and chief executive officer and primary investor in the electric car manufacturer Tesla Motors.¹⁸ Successful serial entrepreneurs achieve rock star status. For the movie Iron Man, actor Robert Downey Jr. patterned his portrayal of the fictional character Tony Stark after the real-life accomplishments of Elon Musk.¹⁹

Some entrepreneurs focus on solving society's challenges through their businesses. A social entrepreneur recognizes a societal problem and uses business principles to develop innovative solutions. Social entrepreneurs are pioneers of innovations that benefit humanity. Samuel Kaymen's Stonyfield Farm is a hugely successful company and a model for social entrepreneurs. In addition to producing a healthy organic yogurt, the company established a “Profits for the Planet” program that commits 10 percent of its annual profits to people and organizations working to restore and protect the environment. Stonyfield is also known for using its yogurt lids—millions of them each week—to promote causes, organizations, and environmental initiatives.²⁰

CHARACTERISTICS OF SUCCESSFUL ENTREPRENEURS

People who start businesses are pioneers in their own right. They aren't satisfied with the status quo and want to achieve certain goals on their own terms. They also tend to possess specific personality traits. Researchers who study successful entrepreneurs report that they are more likely to be curious, passionate, self-motivated, honest, courageous, and flexible. The eight traits summarized in FIGURE 6.2 are especially important for people who want to succeed as entrepreneurs.

Entrepreneurs work hard because they want to excel. Their strong competitive drive helps them enjoy the challenge of reaching difficult goals and promotes dedication to personal success. A poll conducted by About.com showed Oprah Winfrey as the most admired entrepreneur among adults. The first African American woman billionaire, Winfrey built an empire stretching from television to magazines to radio. Her own words best illustrate her strong drive: “I don't think of myself as a poor, deprived ghetto girl who made good. I think of myself as somebody who from an early age knew I was responsible for myself, and had to make good.”²¹

Entrepreneurs believe in their ability to succeed, and they instill their optimism in others. Often their optimism resembles fearlessness in the face of difficult odds. They see opportunities where others see danger lurking. Entrepreneurs often succeed by sheer will and the ability to try and try again when others would give up. They also view setbacks and failures as learning experiences and are not easily discouraged or disappointed when things don't go as planned. When things go well, it's easy to take personal credit. But when poor business decisions result in failure, it's a bit more difficult. Truly successful entrepreneurs are willing to take responsibility for their mistakes.

Entrepreneurs work long and hard to realize their visions. Many entrepreneurs work full-time at their regular day jobs and spend weeknights and weekends launching their start-ups. Entrepreneurs often work alone or with a very small staff, which means that they often wear most—if not all—of the hats required to get the business going. Most entrepreneurs spend at least 70 hours a week on their new business.²² Thus they need a high level of energy in order to succeed.

If this sounds like you, then you may have what it takes to be an entrepreneur.

The Franchising Alternative

While we might all like to think we can come up with the next “new big thing,” the reality is that many entrepreneurs are not able to transform their business ideas into successful enterprises.²³ As we will see in Chapter 12, business people face significant challenges in turning new ideas into successful products. And not only must entrepreneurs worry about developing their products; they also have to work diligently to

• establish their business operations
• hire employees
• obtain financing
• contract with suppliers
• set up product distribution, marketing, and promotion

Failure in any one of these areas can lead to failure of the entire venture.

To reduce these risks, some entrepreneurs may choose to follow business models that have been developed and successfully implemented by others. Franchising is just such an approach, where an entrepreneur acquires a license to use a company's name, suppliers, know-how, and advertising in their own business. For entrepreneurs, franchises often combine the best of both worlds, offering them the ability to develop their own business while at the same time enjoying the advantages of being part of a larger organization. Franchising is a contractual business arrangement between a manufacturer or another supplier and a dealer such as a restaurant operator or a retailer. The contract specifies the methods by which the dealer markets the product of the supplier. Franchises can involve both goods and services, such as food staff and servers. The top ten franchises from Entrepreneur's Franchise 500 are shown in TABLE 6.2. The ranking is based on a set of criteria developed by Entrepreneur, and the annual list is in its 34th year.

THE FRANCHISING SECTOR

Franchised businesses are a huge part of the U.S. economy, accounting for over 9 million jobs in the U.S. workforce. The International Franchise Association reported that franchising is responsible for over 800,000 businesses at a gross value of over $8 billion. Business sectors currently experiencing the most growth are quick-service restaurants, retail food, and personal and business services.²⁴

Franchising overseas is also a growing trend for businesses whose goal is to expand into foreign markets. It seems that, anywhere you go in the world, you can get a McDonald's burger. But other international franchises are also common. Baskin-Robbins—owned by Dunkin' Brands—has more than 6,700 stores worldwide in such countries as Australia, Canada, China, Japan, Malaysia, and Russia.²⁵

FRANCHISING AGREEMENTS

The two principals in a franchising agreement are the franchisee and the franchisor. The individual or business firm purchasing the franchise is called the franchisee. This business owner agrees to sell the goods or services of the franchisor under certain terms. The franchisor is the firm whose products are sold by the franchisee. For example, McDonald's Corp. is a franchisor. Your local McDonald's restaurant owner is most likely a franchisee.

Franchise agreements can be complex. They involve an initial purchase fee plus agreed-on start-up costs. Because the franchisee is representing the franchisor's brand, the franchisor usually stipulates the purchase of certain ingredients or equipment, pricing, and marketing efforts. The total start-up cost for a SUBWAY franchise may be as low as $78,600.²⁶ In contrast, McDonald's is one of the more expensive franchises—total start-up costs can run more than $1 million. For this reason, business people interested in purchasing a more expensive franchise often group together.

BENEFITS AND PROBLEMS OF FRANCHISING

Like any other type of business arrangement, franchising has its benefits and drawbacks. Benefits for the franchisor include opportunities for expansion that might not otherwise be available. A franchised business can move into new geographic locations, including overseas, employing workers with knowledge of local preferences. A good franchisor can manage a much larger and more complex business—with fewer direct employees—than could be handled without the franchise option.

Franchising can also have its downside—for both franchisors and franchisees. For the franchisor, if its franchisees fail in any way, that failure reflects on the brand as well as the bottom line. The same holds true for the franchisee: A firm that is mismanaged at the top level can spell doom for the people who are actually running the individual units. Of course, in offering franchise opportunities, the franchisor—often the founder of what was once a small business—loses absolute control over every aspect of the business. This uncertainty can make the process of selecting the right franchisees to carry out the company's mission a difficult one.²⁷

Because franchises are so closely linked to their brand, franchisors and franchisees must work well together to maintain standards of quality in their goods and services. If customers are unhappy with their experience at one franchise location, they might avoid stopping at another one several miles away, even if the second one is owned and operated by someone else. This is especially true where food is involved. The discovery of tainted meat or produce at one franchise restaurant can negatively affect the entire chain. A potential franchisee would be wise to thoroughly research the financial performance and reputation of the franchisor, using resources such as other franchisees and the Federal Trade Commission.

Promoting Intrapreneurship

Franchising illustrates one way to integrate entrepreneurs into established businesses. Companies can also try to foster an entrepreneurial spirit in their employees by encouraging intrapreneurship, the process of promoting innovation within their organizational structures. Today's fast-changing business climate compels established firms to innovate continually to maintain their competitive advantages. Another form of intrapreneurship is a skunkworks, a project initiated by an employee who conceives an idea, convinces top management of its potential, and then recruits human and other resources from within the company to turn that idea into a commercial project.

Many companies encourage intrapreneurship—some organizations, including Google, have formalized the role of the intrapreneur through official positions such as the “Entrepreneur In Residence” (EIR) or “Chief Innovation Officer.”²⁸ 3M is a firm that has long been known for its innovative products. Ranging from Post-It Notes and Scotch Tape to Nutri Dog Chews and Thinsulate insulation, there are more than 55,000 3M products either on store shelves or embedded in other firms' goods.²⁹

Coming up with the ideas for these products, developing them, and testing them before bringing them to market takes time and resources. Former 3M CEO George Buckley believes that the only way to do this is to allocate both time and money in support of intrapraneurship. Despite the recent recession, Buckley maintained $1 billion for research and development. 3M allows its researchers to devote 15 percent of their time to pursue their own ideas. One recent successful product that resulted from this is the first electronic stethoscope with Bluetooth technology. The company also awards annual Genesis Grants, worth up to $100,000, to 3M scientists for research.³⁰

NOTES

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  3. Company Web site, http://www.foxconn.com/companyintro.html, accessed March 13, 2013.

  4. “Terry Gou,” Forbes Profile, www.forbes.com, accessed September 9, 2013; Foxconn Technology, “Business Day,” New York Times, September 24, 2012, http://topics.nytimes.com.

  5. Mark Henricks, “Honor Roll,” Entrepreneur, http://www.entrepreneur.com, accessed March 13, 2013.

  6. Company Web site, http://www.dell.com, accessed March 10, 2013.

  7. Company Web site, http://www.4food.com, accessed September 9, 2013; Amelia Levin, “4FOOD,” Restaurant Development and Design, September 28, 2012, http://www.rddmag.com.

  8. Company Web site, http://www.turningtechnologies.com, accessed March 13, 2013.

  9. Organization Web site, http://www.keiretsuforum.com, accessed March 13, 2013.

10. Devin Thorpe, “Eight Crowdfunding Sites for Social Entrepreneurs,” Forbes, September 10, 2012, http://www.forbes.com.

11. Organization Web site, “View Profile: Britta Riley, Windowfarms,” http://socialcapitalmarkets.net, accessed March 13, 2013; company Web site, http://www.windowfarms.com, accessed March 13, 2013.

12. Association Web site, http://www.nbia.org, accessed March 13, 2013.

13. Organization Web site, http://www.nasa.gov, accessed March 13, 2013.

14. Science Daily Web site, “Ernest H. Volwiler Information,” http://inventors.sciencedaily.com, accessed March 12, 2013.

15. Company Web site, “Peter Taunton video,” http://www.snapfitness.com, accessed March 10, 2013.

16. Liz Welch, “John Vechey: Don't Waste Time with Mission Statements,” Inc. magazine, http://www.inc.com, March 6, 2013.

17. Company website, http://www.fortheloveofdog.com, accessed April 9, 2013.

18. Personal Web site, http://elonmusk.com, accessed March 10, 2013.

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